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Best Buy’s Stock Falls Following Cautious Fourth Quarter Outlook

Why Best Buy Delivered Mixed Results, Subdued Outlook in 3Q16

(Continued from Prior Part)

Cautious outlook for 4Q16

Best Buy’s (BBY) stock fell 2.1% to $30.67 on November 19 in reaction to the company’s third-quarter results and a cautious outlook for the fourth quarter of fiscal 2016. The SPDR S&P Retail ETF (XRT), which has 1.0% exposure to Best Buy, fell 0.8% on the same day.

Best Buy’s stock price has fallen 20.9% on a year-to-date basis. The stock prices for GameStop (GME) and Conn’s (CONN) have risen by 13.8% and 31.4%, respectively, since the start of the year. However, the stock price for Aaron’s (AAN) has fallen by 23.1% since the start of 2015.

Fourth quarter outlook

Referring to the consumer electronics industry as defined and tracked by the NPD Group, Hubert Joly, Best Buy’s chairman and chief executive officer, stated that he expects the NPD industry declines that were witnessed in 3Q16 to continue in the fourth quarter as well.

In its domestic business, Best Buy is expecting almost flat revenue in 4Q16, given the continued weakness in the NPD reported categories and also due to the shift in the timing of the Super Bowl to the first quarter of fiscal 2017. The company expects the 4Q16 adjusted operating margin to decline by 20 to 35 basis points due to pressure on the gross margin and a rise in selling, general, and administrative (or SG&A) expenses due to growth investments.

The 4Q16 gross margin is expected to be under pressure due to investments to support the services business, higher distribution costs associated with the growth in the online channel and the appliance and large-screen television categories, and product mix and product cycle pressures. The 4Q16 gross margin is expected to be favorably affected by a 55 basis point periodic profit sharing benefit from the company’s externally managed extended service plan portfolio.

In the international business, Best Buy expects its 4Q16 revenue to decline by ~30% due to the impact of currency headwinds, Canadian brand consolidation, and the softness in the Canadian market. The company expects its international adjusted operating margin to be in the 2% to 3% range.

Overall, Best Buy’s outlook suggests a negative low-single-digit revenue growth rate in 4Q16. The overall operating margin is expected to decline by 25 to 45 basis points.

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