Can Best Buy Keep Beating Expectations In Q4?

Best Buy (NYSE: BBY) is scheduled to announce its fiscal fourth quarter results on Wednesday, February 27. The retailer’s revenue and earnings per share came in ahead of market expectations so far this year. In the first nine months of fiscal 2019, the company’s revenue grew 5% year-over-year (y-o-y) to around $28 billion, largely due to an enterprise comparable sales increase of 5.8%. The company benefited from stronger consumer demand across major categories, particularly the mobile phone, gaming, and wearables categories. The retailer also reported non-GAAP EPS of $2.65 in the quarter, up 30% y-o-y, primarily driven by a lower effective tax rate and higher domestic revenue. However, the company’s stock declined by nearly 25% over the course of 2018, despite strong financial results. This was largely due to the retailer’s aggressive push to keep up with Amazon, which led to shrinking margins, as well as disappointing fourth quarter guidance, in addition to a broader market sell-off toward the end of the year.

Our $73 price estimate for Best Buy’s stock is almost 20% ahead of the current market price. We have created an interactive dashboard on What To Expect From Best Buy’s Q4 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. In addition, you can see all of our Trefis Consumer Discretionary company data here.

Q4 Expectations

In the first three quarters of fiscal 2019, Best Buy’s selling, general and administrative (SG&A) expenses grew 4% y-o-y, due to increases in growth investments, higher incentive compensation expenses, and higher variable costs due to increased revenue. As a result, the retailer’s operating margin was 3.5%, down 40 basis points, during the same period. The company’s margins also suffered due to increased fulfillment costs resulting from growth in digital sales. Going forward, we expect this margin pressure to continue in Q4 as well – driven by increased investments in the supply chain and higher transportation costs.

For Q4, Best Buy expects its top line to range between $14.4 billion and $14.8 billion, compared to the consensus estimate of $14.7 billion. In addition, the retailer also expects non-GAAP EPS of $2.48 to $2.58, compared to a consensus estimate of $2.57. Further, Best Buy expects to see a flattish gross margin compared to last year, as approximately 25 basis points of supply chain pressure and a $50 million lower profit sharing benefit could be partially offset by slightly better year-over-year merchandise margins in Q4. The company also expects its SG&A expenses to decline in the low-single digits in Q4, due to an extra week last year and lower short-term incentive compensation, partially offset by the impact of GreatCall’s operating expenses. In terms of comparable sales, Best Buy has guided for overall comparable sales growth of flat to up 3% in Q4. The company is facing the downside of posting improved comparable sales growth marks over the last two years, as the upcoming quarterly comparisons become tougher to match. We expect the company’s Q4 revenues to decline y-o-y, largely due to one fewer week compared to the same quarter last year.

Fiscal 2019 Outlook

For full-year fiscal 2019, Best Buy has raised its guidance and now expects revenues of $42.5 billion to $42.9 billion, compared to the previous guidance of $42.3 billion to $42.7 billion. The retailer is now calling for same-store sales to climb as much as 5%, compared with a prior target of 4.5%. In addition, the company also raised its profit outlook to range between $5.09 and $5.19, compared with a prior range of $4.95 and $5.10 a share. The retailer’s investments in specialty labor and supply chain, as well as increased depreciation related to strategic capital investments and ongoing pressures in the business, 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 fiscal 2018 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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