Best Buy’s earnings could grow at a double-digit rate
We expect the company to sustain the momentum in sales, which reflects higher comps in the domestic segment. However, weakness in the international division could continue to limit Best Buy’s top-line growth rate.
We expect the company’s profit margins to expand on a YoY (year-over-year) basis. The profit margin expansion rate will likely to be higher than the growth in the second quarter. Sales growth and cost-savings will likely drive Best Buy’s margins in the third quarter. A higher gross margin rate and share buybacks could drive double-digit earnings growth. However, a higher YoY tax rate could remain a drag.
What management expects
Best Buy’s management expects its third-quarter revenues to be $9.65 billion–$9.75 billion. Meanwhile, comparable sales are expected to increase 0.5%–1.5%. Management expects the third-quarter gross margin to continue to expand compared to last year. The gross margin growth rate will likely be higher than what the company reported in the second quarter.
Notably, Best Buy’s gross margin expanded by 10 basis points in the second quarter. Higher margins from the services category in the international segment and benefits from GreatCall’s acquisition in the domestic division will likely support Best Buy’s third-quarter margins.
Management expects the adjusted EPS to be $1.00–1.05 in the third quarter, which implies a YoY growth of 8%–13%.
Analysts’ expectations for Best Buy’s Q3 earnings
Analysts expect Best Buy to post revenues of $9.70 billion in the third quarter, which implies a YoY growth of 1.2%. The projection reflects a sequential deceleration in the sales growth rate.
Notably, Best Buy posted revenues of $9.54 billion in the second quarter, which increased 1.7% on a YoY basis. Comparable sales rose 1.6% during the last reported quarter. However, Best Buy’s sales and comps fell short of analysts’ estimates.
Strength in the appliances category could drive the company’s comps and its overall revenues in the third quarter. Also, growth in the services category could drive Best Buy’s top line. Online revenues could continue to drive domestic sales. Higher average order value and increased traffic will likely support online sales. However, negative currency rates and challenges in Canada could continue to hurt. Moreover, tough YoY comparisons could limit the comps growth rate.
Analysts expect Best Buy to post an adjusted EPS of $1.03, which implies a YoY growth of 10.8%. Margin expansion and a lower outstanding share count could drive the company’s third-quarter EPS. However, higher taxes could restrict the company’s earnings growth.
So far, Best Buy stock has outperformed the broader markets this year. The stock has risen 37.2% on a YTD (year-to-date) basis. The upside in the stock seems limited considering the YTD surge and tariff concerns.
During the second-quarter conference call, Best Buy narrowed its comparable sales growth outlook due to challenges from tariffs. However, management doesn’t expect the tariffs to impact its third-quarter performance.
The analysts covering Best Buy stock maintained a neutral outlook. Uncertainty about the US-China trade war and more competitive activity in the domestic market kept analysts on the sidelines.
Analysts maintained an average target price of $77.25 on Best Buy stock. The target price implies an upside of 6.4% based on the closing price of $72.64 on November 22.