Best Buy Sidesteps the Smartphone Slowdown
With Apple seeing sluggish demand for its pricey new iPhones, and with the overall smartphone market in a state of malaise, Best Buy (NYSE: BBY) couldn't rely on mobile devices to drive growth in the fourth quarter. Thankfully for the consumer electronics retailer, other products picked up the slack.
Best Buy grew its comparable sales by 3% in the holiday quarter. Total revenue declined by 3.5%, but that was due to an extra week last year and the closing of Best Buy's small-format mobile stores. Smartphones were a drag on growth, but that weakness was more than offset by wearables, appliances, smart home, and gaming.
Best Buy will grow more slowly in fiscal 2020. The company forecast comparable-sales growth between 0.5% and 2.5%, and non-GAAP earnings-per-share growth between 2.4% and 6.2%. But that's more impressive than it seems given the state of the smartphone market.
Image source: Best Buy.
Growth across the board
Best Buy managed to grow comparable sales in each of its five product categories in the U.S. during the fourth quarter, but the computing and mobile phones segment was by far the weakest. A decline in mobile phone sales knocked down segment growth to just 1.2%, compared to 9.6% growth in the fourth quarter of last year.
Domestic Segment | Comparable-Sales Growth |
|---|---|
Computing and mobile phones | 1.2% |
Consumer electronics | 2.9% |
Entertainment | 2.7% |
Appliances | 8.5% |
Services | 13.7% |
Data source: Best Buy.
Best Buy's appliance business may have benefited from the bankruptcy of Sears Holdings. Best Buy is already one of the top appliance sellers in the U.S., behind only Lowe's and Home Depot, so it likely picked up a meaningful piece of Sears' lost sales.
The services segment benefited from a change in the revenue recognition policy. Best Buy CFO Corie Barry attributed about half of the company's services growth to that change during the earnings call, but she noted that there's still strong underlying growth in the segment. Best Buy acquired GreatCall, the company behind the Jitterbug and associated services, last year, which should contribute a few hundred million dollars of annual service revenue.
Smartphones may not be a major growth driver for Best Buy anytime soon. The U.S. and global smartphone markets are now in decline, the result of market saturation and elongated upgrade cycles. Apple's expensive new iPhones aren't selling well, and the era of big year-to-year improvements in smartphones appears to be over. It's not surprising that consumers are sticking with their devices for longer.
Best Buy grew its adjusted earnings per share faster than revenue in the fourth quarter. Non-GAAP EPS came in at $2.72, up 12.4% year over year. A lower adjusted effective tax rate and reduced operating costs offset a slightly lower gross margin and pushed up the bottom line.
Slower growth ahead
Best Buy isn't expecting a blockbuster year in fiscal 2020, but it does expect to grow. Total revenue is expected between $42.9 billion and $43.9 billion, up from $42.88 billion in fiscal 2019. Guidance calls for non-GAAP EPS between $5.45 and $5.65, up from $5.32. Best Buy's guidance tends to be conservative.
Best Buy has cut out most of the fat over the past six years, reducing costs as part of its turnaround. This cost-cutting has helped offset investments in e-commerce and labor, and it's pushed up the bottom line substantially. Non-GAAP EPS soared 20% in fiscal 2019, despite minimal revenue growth.
That cost-cutting strategy is now mostly played out, so earnings growth will need to be driven by revenue growth in the years ahead. Weak demand for smartphones won't help the cause, although growth in the services business can pick up some of the slack.
Investors were right to cheer Best Buy's strong fourth-quarter report and its ability to grow despite slumping smartphone sales, but don't expect much more than sluggish growth from the retailer this year.
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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AAPL. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends HD and LOW. The Motley Fool has a disclosure policy.
