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What’s Expected for Best Buy’s Margins in Fiscal 2020

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Why Best Buy’s gross margin narrowed last year

In fiscal 2019,[1.ended February 22] Best Buy’s (BBY) gross margin narrowed by 20 basis points to 23.2%. Its gross margin contracted by ten basis points to 23.3% due to higher supply chain costs, including increased transportation costs. The domestic segment’s fiscal 2019 gross margin was boosted by improvement in its GreatCall (acquired in October 2018), service, and product margins.

Best Buy’s international gross margin narrowed by ~30 basis points to 22.9% in fiscal 2019. Its gross margin in the first nine months of fiscal 2019, weaker because of narrower-margin product sales, more than offset improvement seen in the fourth quarter. During the last quarter, its gross margin was boosted by 50 basis points by certain product categories in Canada and higher revenue from its wider-margin rate service business.

Best Buy’s operating margin was flat at 4.4% in fiscal 2019, with improvement in its selling, general, and administrative expense rate being offset by its narrower gross margin and higher restructuring charges. Excluding one-time items, its adjusted operating margin was 4.6% in fiscal 2019. Best Buy’s domestic operating margin increased by ten basis points to 4.6% in fiscal 2019, and its international operating margin improved by 30 basis points to 2.9%.

Productivity savings

Best Buy aims to continue to drive efficiencies and reduce costs amid retail competition. The company has generated cumulative savings of $500 million since the second quarter of fiscal 2018, including annualized cost reductions of over $250 million in fiscal 2019. Best Buy’s goal is to generate cumulative savings of $600 million by fiscal 2021.

In fiscal 2020, Best Buy anticipates its gross margin to be almost unchanged from fiscal 2019, expecting supply chain investments and higher transportation costs to be offset by GreatCall’s wider margin. It also forecasts its adjusted operating margin to be flat, at 4.6%.

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