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Best Buy's (BBY) Shares Decline Despite Q2 Earnings Beat

Zacks Equity Research

Best Buy Company, Inc. BBY reported second-quarter fiscal 2020 results, wherein both top and bottom lines improved year over year and the latter beat the Zacks Consensus Estimate for the seventh straight time. While management raised its earnings view for fiscal 2020, it narrowed sales guidance considering the expected tariff impacts, among other factors. Also, sales lagged the consensus mark in the reported quarter.

Consequently, shares of the company declined more than 5% during the pre-market trading session.

Let’s Delve Deep

Best Buy Co., Inc. Price, Consensus and EPS Surprise

This consumer electronics retailer posted adjusted earnings of $1.08 per share, surpassing the Zacks Consensus Estimate of 99 cents. Moreover, the bottom line improved 18.7% year over year, courtesy of improved gross margin and stringent cost management.

On a GAAP basis, earnings came in at 89 cents, up 3.5% from the year-ago quarter.

Though the top line grew 1.7% year over year to $9,536 million, it fell short of the consensus mark of $9,567 million. Enterprise comparable sales were up 1.6% compared with 6.2% in the prior-year quarter.

Adjusted operating margin expanded 20 basis points (bps) to 4%.

Segment Details

Domestic segment revenues rose 2.1% year over year to $8,821 million, driven by decent comparable sales and contributions from the GreatCall acquisition. This was partly offset by a decline in revenues due to the shutdown of 13 large-format stores in the past year. The company witnessed comparable sales growth of 1.9%, backed by robust demand in headphones, tablets, appliances and services, partly negated by weakness in gaming and home theatre categories.

Additionally, comparable online sales at this division increased 17.3% to $1.42 billion, mainly owing to higher traffic and average order values.

The segment’s gross margin expanded 20 bps year over year to 24%, driven by a higher gross margin at GreatCall, which was somewhat countered by increased supply-chain expenses.

International segment revenues decreased 3.4% to $715 million due to the unfavorable impact of foreign currency to the tune of 120 bps. Also, the company recorded comparable sales decline of 1.9% on account of Canada. The segment’s gross margin expanded 70 bps to 23.8%.

Other Financial Details

Best Buy ended the quarter with cash and cash equivalents of $1,289 million, long-term debt of $1,247 million and total equity of $3,285 million. In the fiscal second quarter, the company returned about $363 million to its shareholders via share buybacks of $230 million and dividend payouts of $133 million. On a year-to-date basis, Best Buy returned $595 million to shareholders through buybacks of $328 million and dividend payouts of $267 million.

Moreover, in February, management announced plans to buy back shares worth $750 million-$1 billion in fiscal 2020.

Guidance

Best Buy is progressing well with its Building the New Blue strategy. Also, during the quarter, the company enhanced its health and wellness category via increased assortments and another acquisition. Additionally, Best Buy strengthened its Total Tech Support membership, enhanced supply chain to speed up deliveries and included in-Home Advisors.

All said, management narrowed the top-line guidance but raised the bottom-line view for fiscal 2020. The revision is based on better-than-expected performance in the first half of the fiscal, expected impacts from raised tariffs on Chinese goods and volatile consumer spending patterns.

Best Buy now forecasts Enterprise revenues of $43.1-$43.6 billion compared with the previous guidance of $42.9-$43.9 billion. The company reported Enterprise revenues of $42.9 billion in fiscal 2019. Furthermore, comps are expected to grow 0.7-1.7% compared to the prior view of 0.5-2.5% increase. The company’s comps grew 4.8% in fiscal 2019.

Best Buy now anticipates adjusted operating margin growth to be flat to slightly up compared with 4.6% growth recorded in fiscal 2019. Meanwhile, it expects an adjusted effective tax rate of 24% now, down from the prior projection of 24.5%.

Moreover, adjusted earnings are now envisioned to be $5.60-$5.75 per share, better than $5.45-$5.65 forecasted earlier. The Zacks Consensus Estimate is currently pegged at $5.75.

For the fiscal third quarter, management anticipates Enterprise revenues of $9.65-$9.75 billion and comps growth of 0.5-1.5%. Also, it expects an adjusted effective tax rate of 26.5%. Management expects third-quarter adjusted earnings of $1.00-$1.05 per share, which stands above the current Zacks Consensus Estimate of 96 cents.

Price Performance

This Zacks Rank #3 (Hold) stock has gained 6.1% in the past three months compared with the industry’s growth of 3.4%.

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