Best Buy Has Good Momentum Heading Into the Holidays

Investors were expecting good news from Best Buy (NYSE: BBY) in its third-quarter earnings report, and they weren't disappointed. The stock jumped last week after the retailer posted stronger sales and profits while lifting its outlook for the full year.

Let's dive in.

A couple shopping for a TV.

Image source: Getty Images.

Beating sales targets

Comparable-store sales landed at 1.7%, which was roughly even with the expansion rate from the prior quarter. But that constituted a strong result for two reasons. 

First, the growth came on top of a 4.3% increase in the prior-year period. Second, and more important, executives had predicted a weaker performance, saying back in August that comps would likely land between 0.5% and 1.5%. Exceeding the high end of guidance is always good news for a retailer, but that surprise has more impact when the peak holiday selling season is just getting underway.

Executives credited the same factors that worked for the business in recent quarters, including strong sales of appliances and healthy demand in the services segment. "Our teams delivered another strong quarter of top- and bottom-line growth," CEO Corie Barry said in a press release.

A powerful financial model

A few metrics showed off the growing power of Best Buy's financial model. Gross profit margin held steady despite increased pricing pressures from Chinese tariffs. The shift toward appliance and services sales helped. Cost cuts amplified those gains by reducing selling expenses, leading to operating income of $395 million, or 4% of sales, compared with $322 million, or 3.4%, a year ago.

Through the first nine months of the year, Best Buy's margin has risen to 3.7% from 3.3%, translating into $120 million of additional operating income. Reported net earnings are up 9% in that period despite a slightly higher tax burden.

Looking ahead

Investors were even more pleased to hear about Best Buy's plans and expectations for the holiday season. The retailer sees options for quick delivery and pickup as helping lift results, just as it has for peers like Target in recent quarters. To that end, management raised both its top- and bottom-line targets for the fiscal year.

Revenue should climb to over $43 billion as comps land between 1% and 2% versus the prior range of 0.7% to 1.7%. Non-GAAP (adjusted) earnings will rise to between $5.81 and $5.91 per share, up significantly from the last outlook range of $5.60 to $5.75.

Best Buy's outlook for the fourth quarter includes an unusually large range that reflects uncertainty around tariffs, competitive offerings, and consumer behavior during these peak selling weeks.

Yet the stock's surge following the report suggests investors believe the retailer has a good shot at landing at or above the top end of its short-term guidance. That optimistic reading is supported by the chain's strengthening sales trends and recent success in the e-commerce and services niches. The fact that these wins are supporting higher profit margins means shareholders can expect to see accelerating financial returns, laying the groundwork for solid earnings growth in fiscal 2021.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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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