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Best Buy (BBY) Beats on Q3 Earnings, Raises FY20 Outlook

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Best Buy Company, Inc. (BBY - Free Report) reported robust third-quarter fiscal 2020 results, wherein both the top and the bottom lines surpassed the Zacks Consensus Estimate, and improved year over year. Notably, this marked the eighth straight quarter of earnings beat. Following the impressive performance, management raised its fiscal 2020 earnings guidance.

Markedly, shares of the company increased during the pre-market trading session on Nov 26. In the past six months, shares of this Zacks Rank #3 (Hold) company have increased 12.6%, outperforming the industry’s growth of 11.9%.

Let’s Delve Deeper

This consumer electronics retailer posted adjusted earnings of $1.13 per share, surpassing the Zacks Consensus Estimate of $1.04. Moreover, the bottom line improved 21.5% year over year, courtesy of higher revenues, lower SG&A expenses and share repurchase activities.

On a GAAP basis, earnings came in at 1.10, up 11% from the year-ago quarter.

The company’s top line grew 1.7% year over year to $9,764 million and also beat the consensus mark of $9,740 million. Enterprise comparable sales were up 1.7% compared with 4.3% in the prior-year quarter.

Adjusted operating margin expanded 70 basis points (bps) to 4.2%.

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

 

Segment Details

Domestic segment revenues rose 2.4% year over year to $8,964 million, driven by decent comparable sales and contributions from the GreatCall acquisition. This was partly offset by loss of revenues due to store closure in the past year. The company witnessed comparable sales growth of 2%, backed by robust demand in headphones, tablets, appliances, services and computing partly negated by weakness in gaming and home theatre categories.

Additionally, comparable online sales at this division increased 15% to $1.4 billion, mainly owing to higher average order values.

The segment’s gross margin contracted 10 bps year over year to 24.3% due to mix into lower-margin products somewhat offset by a higher gross margin at GreatCall.

International segment revenues decreased 4.1% to $800 million owing to the unfavorable impact of foreign currency to the tune of approximately 170 bps. Also, the company recorded comparable sales decline of 1.9% on account of Canada. The segment’s gross margin expanded 30 bps to 22.5%.

Other Financial Details

Best Buy ended the quarter with cash and cash equivalents of $1,205 million, long-term debt of $1,239 million and total equity of $3,125 million. In the fiscal third quarter, the company returned about $499 million to its shareholders via share buybacks of $368 million and dividend payouts of $131 million. On a year-to-date basis, Best Buy returned $1.09 billion to shareholders through buybacks of $696 million and dividend payouts of $398 million.

Guidance

Best Buy has been extensively investing to upgrade operations, with special focus on developing omni-channel capabilities, stores and supply chain, new business initiatives, cost-reduction opportunities, and strengthening partnerships with vendors. It has been making a significant headway into healthcare technology business by undertaking strategic buyouts in the space. Also, the company is on track with the next phase of its “Building the New Blue” program called “Building the New Blue: Chapter Two”.

All said, management provided guidance for fourth-quarter fiscal 2020 and raised its bottom-line view for fiscal 2020. The revision is based on better-than-expected performance in the third quarter of fiscal 2020 and improved expectations for fourth quarter. The guidance also includes impact of raised tariffs on Chinese goods.

Best Buy forecasts Enterprise revenues of $43.2-$43.6 billion compared with the previous guidance of $43.1-$43.6 billion. The company reported Enterprise revenues of $42.9 billion in fiscal 2019. Furthermore, comps are expected to grow 1-2% compared with the prior view of 0.7-1.7% increase. The company’s comps grew 4.8% in fiscal 2019.

Best Buy now anticipates adjusted operating margin to be up slightly compared with 4.6% recorded in fiscal 2019. The company had earlier projected adjusted operating margin to be flat to up slightly.

Moreover, adjusted earnings are now envisioned to be $5.81-$5.91, up from the prior forecast of $5.60-$5.75 per share. The Zacks Consensus Estimate is currently pegged at $5.75.

For the fiscal fourth quarter, management anticipates Enterprise revenues of $14.75-$15.15 billion and comps growth of 0.5-3%. Management expects fourth-quarter adjusted earnings to be $2.65-$2.75 per share. The current Zacks Consensus Estimate for the fourth quarter is pegged at $2.64.

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