uploads///BBY Margin Q

Why Best Buy’s Gross Margin Contracted in Fiscal Q2 2019

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Aug. 31 2018, Updated 7:32 a.m. ET

Gross margin contraction

Best Buy’s (BBY) gross margin contracted 30 basis points YoY (year-over-year) to 23.8% in the fiscal second quarter of 2019. The gross margin of the company’s Domestic segment contracted 20 basis points to 23.8% due to higher supply chain costs resulting from increased investments, higher transportation costs, and the national rollout of the company’s Total Tech Support service.

Higher margins in the smart home and appliance categories were partially offset by margin pressures in the mobile phone and computing categories.

Best Buy’s International segment’s gross margin contracted 200 basis points to 23.1% in the fiscal second quarter of 2019. This notable contraction was caused by a lower gross margin in its Canadian business due to lower rates in the home theater and mobile phone categories.

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Operating margin

Best Buy’s operating margin remained nearly flat YoY at 3.6% in the fiscal second quarter of 2019. The negative impact of a lower gross margin and higher restructuring charges offset the favorable impact of improvements in the company’s SG&A (selling, general, and administrative) expense rate in the quarter.

The company’s SG&A expenses as a percentage of its revenue were 20% in the fiscal second quarter of 2019 compared to 20.5% in the fiscal second quarter of 2018. Despite Best Buy’s higher SG&A expenses in dollar terms, the improvement in its SG&A expense rate was driven by its cost reductions and efficiency measures.

Outlook

Best Buy expects higher supply chain costs to have a negative impact of 25 basis points on the gross margin of its Domestic segment in fiscal 2019. The company also expects the national rollout of its Total Tech Support service to have a negative impact of 15 to 20 basis points on the segment’s fiscal 2019 gross margin.

In the next article, we’ll look at Best Buy’s valuation after its fiscal second-quarter results.

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