Can Best Buy Keep Beating Estimates In The Second Half Of 2018?

Best Buy (NYSE:BBY) announced better-than-expected second quarter results on Tuesday, as both its revenue and earnings per share came in ahead of market expectations. However, the stock still fell as the retailer’s aggressive push to keep up with Amazon led to shrinking margins, and the retailer’s Q3 guidance fell short of market estimates. In Q2, Best Buy’s revenue grew 5% year-over-year (y-o-y) to around $9.4 billion, largely due to an enterprise comparable sales increase of 6.0%, which topped the consensus estimate for a 4.1% gain. The company benefited from stronger consumer demand across all major categories, particularly the appliances, computer and mobile phone categories. The retailer’s online sales grew 10.1% on a comparable basis to $1.21 billion, primarily due to higher conversion and increased traffic. Best Buy also reported non-GAAP EPS of $0.91 in this quarter, up 32% y-o-y, primarily driven by a lower effective tax rate and a higher domestic revenue.

Our $76 price estimate for Best Buy’s stock is slightly below the current market price. We have created an interactive dashboard on what to expect from Best Buy’s fiscal Q3 and fiscal 2019, which outlines our forecasts for the company. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation. Best Buy saw its stock rally by nearly 60% in 2017, and the company’s stock price has increased more than 10% over the course of 2018. Best Buy is executing on its strategy to cut costs, optimize square footage, grow online sales and stabilize its revenue stream. The company returned to real growth in fiscal 2018 (year ending January 2018), with revenue growth of 7% y-o-y to around $42 billion, primarily driven by an enterprise comparable sales increase of nearly 6%. This growth followed almost flattish revenue growth in previous fiscal years.

Q3 Expectations

In Q2, Best Buy’s gross margin was 23.8%, down 30 basis points, largely due to increased fulfillment costs resulting from growth in digital sales. On the cost side, selling, general and administrative (SG&A) expenses grew 3% y-o-y, due to increases in growth investments, higher incentive compensation expenses, and higher variable costs due to increased revenue. Going forward, we expect this margin pressure to continue in Q3 as well – driven by increased investments in the supply chain and higher transportation costs. The company also expects operating margins to decline in the third quarter as investments will ramp up, including those backing the national rollout of a tech support platform.

In Q3, Best Buy expects its sales to benefit from the positive category momentum of the first half of 2019. Best Buy expects its top line to range between $9.4 billion and $9.5 billion, compared to the consensus estimate of $9.49 billion. The retailer also expects non-GAAP EPS of $0.79 to $0.84, compared to a consensus estimate of $0.91. However, Best Buy has guided for a 2.5% to 3.5% comparable sales growth in Q3, which stands at the slowest pace in the last six quarters. The company is facing the consequences of posting improved comparable sales growth marks over the last two years as the upcoming quarterly comparisons become tougher to match.

Fiscal 2019 Outlook

For full year fiscal 2019, Best Buy raised its revenue outlook to range between $42.3 billion to $42.7 billion, compared to the previous guidance of $41 to $42 billion. The retailer is now calling for same-store sales to climb as much as 4.5%, compared with a prior target of flat to 2% growth. In addition, the company also raised its profit outlook to range between $4.95 and $5.10, compared with a prior range of $4.80 to $5.00 a share. The consensus estimates call for the company’s revenues and earnings per share to reach $42.3 billion and $5.01, respectively, in the third quarter. The retailer’s investments in specialty labor, supply chain and increased depreciation related to strategic capital investments and ongoing pressures in the business, including approximately $40 million of lower profit share revenue, will be partially offset by a combination of returns from new initiatives and ongoing cost reductions and efficiencies. To add to that, the company also expects the Best Buy mobile store closures that were announced in Q4 to negatively impact full-year revenue by approximately $225 million, with a flat to slightly positive impact on its operating income.

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