uploads///Best Buy Margins

Best Buy’s Margins Reflect Marked Improvement in 2Q16

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Sep. 6 2015, Updated 9:07 a.m. ET

Gross margin in 2Q16

Best Buy (BBY) reported a gross margin of 24.6% in the second quarter of fiscal 2016, up from 23.4% in the comparable quarter of the previous year. The improvement in the company’s gross margin was attributed to better margins in the Domestic segment, driven by:

  • changes in mobile warranty plans that lowered costs
  • higher margins in the computing hardware business
  • a favorable impact of 25 basis points associated with a periodic profit-sharing payment from Best Buy’s externally managed extended service plan portfolio and an extended warranty deferred revenue adjustment
  • a favorable change in mix arising from increased sales of higher-margin large-screen televisions and fall in the revenue from the lower-margin tablet category

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Higher operating margin in 2Q16

Best Buy’s operating margin in 2Q16 improved to 3.4% from 2.7% in 2Q15 due to higher gross profits, partially offset by growth investments and higher expenses due to inflation.

Cost reduction initiatives

Best Buy’s margins have benefitted from the implementation of the company’s Renew Blue initiative to bring down costs and improve operating performance. As part of this program, the company has exited unprofitable businesses, reduced its headcount, enhanced its store operating model, and optimized its real estate portfolio. Under the second phase of its Renew Blue cost reduction and gross profit optimization program, the company aims to generate $400 million in annualized savings over the next three years. To date, the company has achieved cost reduction of $100 million on an annualized basis.

However, these savings will be offset by growth investments, which are estimated to be $120 million for the current fiscal year. Until now, Best Buy has invested ~$65 million in growth initiatives.

Margins of competitors

Peers Target (TGT), GameStop (GME), and Aaron’s (AAN) reported operating margins of 7.6%, 2.9%, and 8.8% in the comparable second quarter.

Best Buy, Target, and GameStop together constitute 0.5% of the portfolio holdings in the iShares Russell 1000 Value ETF (IWD) and 1.7% of the iShares Global Consumer Discretionary ETF (RXI).

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