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Can Best Buy Deliver Higher Earnings in Fiscal 2019?

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Recap of recent performance

Best Buy’s (BBY) adjusted EPS rose an impressive 36.7% to $0.82 in the first fiscal quarter of 2019, which ended on May 5. The company’s adjusted EPS easily exceeded the consensus analyst estimate of $0.74.

Higher revenue and lower taxes drove Best Buy’s earnings growth in the first fiscal quarter of 2019. Its adjusted effective tax rate was 20% compared to 35.6% in fiscal Q1 2018. Share repurchases favorably impacted the company’s adjusted EPS by $0.07.

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Margins: A matter of concern

Best Buy’s gross and operating margins declined in the fiscal first quarter. Its gross margin fell 40 basis points to 23.3% in the first fiscal quarter of 2019 due to rate pressure in the mobile phone category of the domestic segment. Its operating margin declined to 2.9% from 3.5% in fiscal Q1 2018. Higher expenses, an increase in depreciation, and a rise in variable costs due to higher sales dragged down the operating margin of the company’s domestic segment by 60 basis points to 3.2%.

The international segment’s operating margin fell to -0.3% in the fiscal first quarter from 0.3% in fiscal Q1 2018 due to currency headwinds and higher depreciation.

Will profitability improve?

Best Buy expects its adjusted EPS to increase 9%–13% to $4.80–$5 in fiscal 2019[1. Fiscal 2019 ends on February 2, 2019.] compared to $4.42 in fiscal 2018.

Its gross margin in fiscal 2019 is expected to be adversely impacted by higher transportation costs, increased investment in supply chain costs, and the national rollout of its Total Tech Support service offering.

Best Buy is implementing several productivity measures to improve its margins. The company has delivered cost savings of $1.4 billion over the last five years and aims to generate an incremental annualized cost savings of $600 million by the end of fiscal 2021. In the first fiscal quarter of 2019, it achieved annualized cost savings of $70 million.

Analysts expect Best Buy’s adjusted EPS to rise 18.8% to $0.82 in the second fiscal quarter of 2019. We’ll look at analysts’ expectations for Best Buy’s fiscal 2019 earnings and look at the company’s valuation in the next part of this series.

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