Best Buy (BBY 64.32, -2.11, -3.18%) will report third quarter (October) results tomorrow
morning and management will host a conference call at 10:00 AM EST.
Despite the recent sell-off in the stock, expectations are high as analysts expect third quarter and fiscal 2019 results above guidance.
The company guided for third quarter non-GAAP EPS up 1-8% to $0.79-0.84 with revenue up 1.4% at the midpoint to $9.4-9.5 bln and comparable store sales up 2.5-3.5%, including a 70 basis point headwind from a calendar shift that will be a tailwind in the fourth quarter.
Best Buy's outlook for fiscal 2019 (ending January) calls for non-GAAP EPS up 12-15% to $4.95-5.10 on revenue of $42.3-42.7 bln (+0.8%) with comparable store sales up 3.5-4.5% and adjusted operating margins flat at 4.5%. Best Buy said operating margins would decline in the third quarter but expand in the fourth quarter.
Guidance appears somewhat conservative after comparable store sales grew 7.1% in the first quarter and 6.2% in the second quarter. Comparable store sales grew 4.5% in the third quarter last year. Best Buy faces tough comps going forward as the company reported fourth quarter comparable sales up 9% last year.
Best Buy has handily beaten expectations five of the last six quarters. The company has done a very commendable job taking market share in the consumer electronics retail market by investing in eCommerce and service initiatives while keeping prices competitive.
Last quarter, the domestic comparable sales growth of 6% (92% mix) included a ~150-basis point benefit from a calendar shift resulting from the extra week in FY18. From a merchandising perspective, the company generated comparable sales growth across multiple categories, with the largest drivers being home theater, computing, appliances, gaming, mobile phones, and smart home. These positive drivers were partially offset by declines in digital imaging and tablets. Domestic online revenue grew 10% on a comparable basis.
Gross margins fell 20 basis points yr/yr, missing estimates, as supply chain investments, higher transportation costs and the Total Tech Support rollout offset improved product margins.
The stock got hit on soft third quarter guidance and the gross margin miss and has remained out of favor as the broader market weakened this Fall.
Still, the strong US consumer continues to provide a solid tailwind. Last week, the U.S. Census Bureau reported core retail sales up 5% yr/yr and electronics and appliance sales up 2.4% yr/yr for the three months ending October.
Best Buy's report may provide a read through for iPhone sales, where concerns have grown amid reports of production cuts while Apple (AAPL) suppliers lower guidance. Last quarter, domestic segment computing and mobile phone comparable sales grew 4.2%, accounting for 45% of sales. In the third quarter of last year, computing and mobile phone comps grew 3.5% at a 48% mix.
The largest US electronics retailers has a market cap of just under $18 bln and the stock trades at ~12.5x earnings estimates. A broad group of retailers sport a 15x EPS multiple on average. The options market implies a 10% move in the stock by Friday.
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