What drove BBY’s gross margin expansion?
Best Buy’s (BBY) gross margin expanded about 40 basis points on a year-over-year basis to 23.7% in the first quarter of fiscal 2020, which ended on May 4. Its gross margins improved in both its Best Buy Domestic and International segments.
The Domestic segment’s gross margin expanded 40 basis points to 23.7% due to a higher gross margin associated with GreatCall (acquired in August 2018) and improved product margins. However, higher supply chain costs adversely affected the segment’s gross margin.
The International segment’s gross margin expanded 80 basis points to 24.2% as the company’s Canadian operations saw improved gross margins in several product categories and increased revenue from the higher-margin services business.
Operating margin improved in the first quarter
Best Buy’s operating margin increased 80 basis points to 3.7% on a reported basis and 50 basis points to 3.8% on an adjusted basis in fiscal 2020. Its operating margin improvement was driven by its enhanced gross margin and its expense-management efforts.
The company’s overall selling, general, and administrative expense rate decreased ten basis points to 19.9% on an adjusted basis in the first quarter due to lower incentive compensation expenses in the Domestic segment and the favorable impact of foreign currency movements in the International segment.
Best Buy expects its fiscal 2020 gross margin to be flat in fiscal 2020 compared to fiscal 2019, as its supply chain investments and increased transportation costs are expected to be offset by the higher margin associated with GreatCall.
Best Buy expects its adjusted operating income to be flat at 4.6% in fiscal 2020 compared to fiscal 2019. Best Buy’s operating margin is expected to be under pressure due to continued investments in technology and higher wages offset by cost reductions and operational efficiencies.
In the first quarter of fiscal 2020, Best Buy generated $35 million in annualized cost reductions and efficiencies, achieving cumulative savings of $575 million since the second quarter of fiscal 2018. Best Buy aims to generate $600 million in productivity savings by fiscal 2021.