Best Buy: Why It Had a Big Earnings Beat

  • Best Buy crushed analysts’ third-quarter earnings estimate.
  • The stellar third-quarter performance led Best Buy to raise its fiscal earnings outlook.

Today, Best Buy (BBY) posted stronger-than-expected earnings results for the third quarter of fiscal 2020. The company’s revenues beat analysts’ expectations. Meanwhile, the company’s earnings beat the consensus estimate by a wide margin.

Sustained momentum in domestic comparable sales, higher digital sales, and cost-savings drove Best Buy’s third-quarter earnings. The company posted an adjusted EPS of $1.13 on revenues of $9.76 billion. Analysts expected Best Buy to post an adjusted EPS of $1.03 on revenues of $9.70.

Best Buy also beat management’s guidance. Management expected the revenues to be $9.65 billion–$9.75 billion. Meanwhile, the comparable sales growth forecast was 0.5%–1.5%. The company expected the adjusted EPS to be $1.00–1.05 in the third quarter.

Best Buy’s Q3 revenues

Best Buy posted revenues of $9.76 billion—up 1.8% YoY (year-over-year). Continued momentum in the domestic segment supported the top-line growth. The domestic segment’s revenues increased 2.4% YoY to $8.96 billion. Higher comparable sales and benefits from the GreatCall acquisition drove the company’s top-line growth. However, store closures remained a drag.

Comparable sales in the domestic segment increased 2% YoY. As expected, Best Buy’s third-quarter comparable sales benefited from a continued strong performance in the appliances and services category. Growth in headphones, tablets, and computing categories also drove comparable sales. However, weakness in the gaming and home theater categories remained a drag.

The domestic segment’s online revenues rose 15% YoY to $1.40 billion, which reflected higher average order values. Meanwhile, online sales represent 15.6% of the total domestic revenues.

The international segment’s revenues fell 4.1% to $0.8 billion, which reflected lower comparable sales of 1.9%. Continued weakness in Canada remained a drag. Moreover, negative currency rates had a negative impact of 1.7%.

Analyzing the Q3 earnings 

Best Buy’s gross margin stayed flat at 24.2%. Declines in the domestic segment were offset by higher margins in the international division. The gross margin in the domestic market fell by 10 basis points to 24.3%. The mix shift toward low-margin products dragged the margins down. The international segment’s gross margin expanded by 30 basis points, which reflected gains in Canada.

Best Buy’s adjusted SG&A expense rate fell by 70 basis points to 20%. A decline in the incentive compensation expense and tight cost control drove the YoY improvement.

Best Buy’s adjusted operating margin expanded by 70 basis points to 4.2%, which reflected lower SG&A expenses as a percentage of sales.

Better-than-expected sales and margin expansion drove double-digit EPS growth in the third quarter. Best Buy posted an adjusted EPS of $1.13, which rose 21.5% YoY. Moreover, the adjusted EPS beat analysts’ expectations of $1.03.

However, a higher adjusted effective tax rate remained a drag on the bottom line. The adjusted tax rate was 24.8% in the third quarter compared to 22.7% the previous year.

Best Buy’s higher earnings guidance

Buoyed by the stellar third-quarter performance, Best Buy raised its fiscal earnings outlook. Management expects the adjusted EPS to be $5.81–$5.91—up from its previous guidance of $5.60–$5.75. The new forecast is higher than analysts’ estimates. Analysts expect Best Buy to post an adjusted EPS of $5.74 in fiscal 2020.

Management expects the total revenues to be $43.2 billion–$43.6 billion. Meanwhile, comparable sales will likely grow 1.0%–2.0%. Earlier, management expected comparable sales to increase 0.7%–1.7%.

For the fourth quarter, Best Buy expects its revenues to be $14.75 billion–$15.15 billion. The comparable sales will likely increase 0.5%–3.0%. The company’s adjusted EPS will likely be $2.65–$2.75. Analysts’ EPS estimate was $2.65 for the fourth quarter.

A stellar third-quarter performance and upbeat earnings guidance drove Best Buy stock higher. The stock rose nearly 4% in the pre-market session.