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Best Buy Shares Drop After Earnings Beat, but e-Commerce Looks Strong

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Best Buy (BBY - Free Report) reported stronger-than-projected earnings Thursday morning, yet investors were mildly disappointment. The stock fell 7.99% during regular trading hours. However, BBY shares are still up 19.2% YTD.

Earnings Report

Best Buy reported earnings of $1.08 per share, which beat expectations of $0.99 per share by 9.09%. Revenue, however, missed expectations of $9.56 billion by just 0.2%, at $9.54 billion. Investors are especially concerned about Best Buy’s miss on same-store sales growth.

Estimates called for an increase of 2.1% over last year, but the report showed just 1.6% growth in sales of stores open at least 12 months. Most of the same store sales decline was due to international sales trouble, as U.S. comps climbed 1.9%. Meanwhile, international same store sales fell 1.9%. Best Buy said the decline was primarily due to a downturn in Canada.

Best Buy did raise its earnings forecast for full year 2019 by $0.15 from $5.45-$5.60 to a range of $5.60-$5.75. However, Best Buy lowered its full year same-store sales guidance from between 0.5%-2.5% to 0.7%-1.7%. Analysts were expecting 2% full year comps growth before the earnings report.

Outlook

Best Buy, like many other companies, has the dark cloud of escalating tariffs hanging over its head. Tariffs of 15% on many of the products Best Buy sells, like TVs, smartwatches, and headphones, will go into effect on September 1. Then, on December 15, 15% tariffs will go into effect on another set of goods including computers, mobile phones, and gaming consoles.

These tariffs could seriously impact Best Buy’s top and bottom line. If Best Buy eats these extra costs, it will see drastically reduced margins on these expensive goods. But, if Best Buy passes on these costs to consumers, sales numbers will likely fall as customers buy less.

However, Best Buy CEO Corie Barry said that the company expects many vendors to move production out of China in the coming months. She also noted that due to mitigation strategies, the price impact from tariffs will be much smaller than the number of items affected.

Promising Supply Chain

Helping to increase Best Buy’s margins is its innovative and efficient supply chain. Best Buy began modernizing its supply chain when Hubert Joly became CEO in 2012. Fulfillment centers are now using robots instead of workers to pick products from shelves, increasing efficiency and lowering long-term costs.

The company has recently opened its first three “metro e-commerce centers” near New York, Los Angeles, and Chicago. These centers give Best Buy the capability to service next-day orders in metropolitan areas nearby. The centers are much smaller than regional distribution hubs, and only stock about 3,000 of the most popular products.

The company also offers a curb-side pickup option for online orders. When a customer purchases items online, they can opt to receive their order at the nearest Best Buy location. This currently accounts for roughly 40% of Best Buy’s online orders as it is sometimes much quicker than waiting for shipment. It is also much cheaper for large items such as TVs and appliances.

However, Best Buy is just 9th in a ranking of e-commerce market share, according to eMarketer, behind Amazon (AMZN - Free Report) , eBay (EBAY - Free Report) , Walmart (WMT - Free Report) , and just behind Macy’s (M - Free Report) .

Moody’s retail analyst Charlie O’Shea said that Best Buy “is farthest along in what I’ve called the holy grail of retail … They have one pile of inventory in a distribution center both stocking stores and fulfilling online orders.” This is extremely promising for Best Buy’s future as it will likely be able to keep costs down more than competitors due to supply chain efficiency. O’Shea also predicts Best Buy to be one of the best performers this holiday season, as it has in the past.

Financial Metrics

Best Buy currently holds a Zacks Rank #3 (Hold), but this could change as analysts update their estimates after the earnings report. Best Buy is also currently trading at a very similar forward P/E ratio to the rest of the retail consumer electronics market, after historically holding a higher multiple. This could mean the stock is in for a price adjustment to take it back up above the market average.

Bottom Line

Best Buy did not deliver the same-store sales growth Wall Street hoped, a metric that investors consider very important in retail. However, it did outperform on earnings and raised full year earnings guidance.

BBY’s promising short-term outlook, coupled with a more advanced supply chain than its industry, paint an attractive picture going forward. Investors should look to see how Best Buy performs during the critical holiday season and for the continued implementation of important same-day delivery in metropolitan areas.

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