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Best Buy (BBY) Down 17.9% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Best Buy (BBY). Shares have lost about 17.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Best Buy due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Best Buy Q3 Earnings Surpass Estimates, FY19 View Up

Best Buy reported impressive third-quarter fiscal 2019 results, wherein both the top and the bottom lines exceeded the Zacks Consensus Estimate for the fourth straight quarter. Both the metrics also improved on a year-over-year basis. Following the quarterly results, management raised its outlook for fiscal 2019 and issued guidance for the fourth quarter.

Let's Delve Deep

This consumer electronics retailer posted third-quarter adjusted earnings per share of 93 cents, surpassing the Zacks Consensus Estimate of 85 cents. Moreover, the bottom line improved 19% year over year.

On a GAAP basis, earnings came in at 99 cents, up 27% from the year-ago quarter.

The top line increased nearly 2.9% year over year to $9,590 million and trumped the consensus mark of $9,548 million. Enterprise comparable sales were up 4.3% compared with 4.4% in the prior-year quarter.

We note that the company has been consistently benefiting from its Best Buy 2020: Building the New Blue initiative by enhancing the In-Home Advisor program and expanding its Total Tech Support members. Moreover, it completed the buyout of GreatCall, Inc. - a major health services provider - for $792 million.

However, adjusted operating profit came in at $322 million, down 8% year over year. Also, adjusted operating margin contracted 20 basis points (bps) to 3.5%.

Segment Details

Domestic segment revenues rose 3.1% year over year to $8,756 million, primarily owing to a 4.3% increase in comparable sales. This was partly offset by decline in revenues due to the shutdown of 19 large-format and 287 Best Buy Mobile stores in the past year. Comparable-online sales at this division increased 12.6% to $1.21 billion, mainly owing to higher traffic and conversion rates.

The segment's gross profit rose 2.1% to $2,139 million, while adjusted gross margin came in at 24.4%, down 30 bps year over year. Further, adjusted operating income decreased 8.7% to $315 million, with operating margin contracting 50 bps to 3.6%.

International segment revenues edged up 0.6% to $834 million, primarily on the back of a 3.7% rise in comparable sales in Canada and Mexico, and sales from six large-format stores introduced in Mexico over the past year. The improvement was somewhat mitigated by roughly 460 bps adverse impact from foreign currency.

The segment's gross profit inched up 0.5% to $185 million in the reported quarter but adjusted gross margin remained flat at 22.2%. Adjusted operating income came in at $7 million, down from adjusted operating profit of $5 million in the year-ago quarter.

Other Financial Details

Best Buy ended the quarter with cash and cash equivalents of $1,228 million, long-term debt of $1,280 million and total equity of $3,012 million. In the fiscal third quarter, the company returned about $493 million to its shareholders via buybacks of $370 million and dividends of $123 million. Moreover, it expects to buy back $1.5 billion of shares during fiscal 2019.

Guidance

Best Buy raised guidance for fiscal 2019. Management forecasts Enterprise revenues of $42.5-42.9 billion, up from $42.3-$42.7 billion expected earlier. Further, comps are expected to grow 4-5%, up from the prior guided range of 3.5-4.5%. The company anticipates adjusted operating income rate of about 4.5%, flat with the fiscal 2018 level, on a 52-week basis. Meanwhile, it expects an effective tax rate of 24% and earnings per share in the range of $5.09-$5.19, reflecting growth of about 15-17% from fiscal 2018. Earlier, management expected earnings per share in the $4.95-$5.10 range.

For the fiscal fourth quarter, management anticipates Enterprise revenues between $14.4 and $14.8 billion and comps to be flat to up 3%. Management projects adjusted earnings in the band of $2.48-$2.58 per share. Also, the company expects both domestic and international comps in the range of flat to up 3% for the quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Best Buy has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Best Buy has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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