Best Buy (BBY) Up 2.6% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Best Buy (BBY). Shares have added about 2.6% in that time frame, underperforming the S&P 500.

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

Best Buy Q1 Earnings Beat Estimate, Sales in Line

Best Buy posted first-quarter fiscal 2020 results, wherein the bottom line exceeded the Zacks Consensus Estimate for the sixth straight time, while sales came in-line.  Results gained from decent comparable sales growth in the reported quarter. Also, the company has been progressing well with its Best Buy 2020: Building the New Blue initiative.

Despite reporting better-than-expected earnings, management retained its outlook for fiscal 2020 considering the recent increase in tariffs to 25% from 10% on products worth $200 billion imported from China. Also, it issued guidance for second-quarter fiscal 2020, wherein the bottom line is expected to be 95 cents to $1.

Let’s Delve Deep

This consumer electronics retailer posted fiscal first-quarter adjusted earnings of $1.02 per share, surpassing the Zacks Consensus Estimate of 88 cents. Moreover, the bottom line improved 24% year over year.

On a GAAP basis, earnings came in at 98 cents, up 36.2% from the year-ago quarter.

The top line increased nearly 0.4% year over year and came in-line with the consensus mark of $9,142 million. Enterprise comparable sales were up 1.1% compared with 7.1% in the prior-year quarter.

However, adjusted operating profit came in at $351 million, up 16.2% year over year. Also, adjusted operating margin expanded 50 basis points (bps) to 3.8%.

Segment Details

Domestic segment revenues inched up 0.8% year over year to $8,481 million, driven by decent comps and contributions from the GreatCall acquisition. This was partly offset by decline in revenues due to the shutdown of 12 large-format and 105 Best Buy Mobile stores in the past year. The company witnessed comparable sales growth of 1.3%, backed by robust demand in wearable devices, tablets and appliances. In addition, comparable online sales at this division increased 14.5% to $1.31 billion, mainly stemming from higher traffic and average order values.

The segment’s gross profit advanced 2.4% to $2,009 million, while adjusted gross margin expanded 40 bps year over year to 23.7%. Further, adjusted operating income increased 15.2% to $349 million, with the operating margin expanding 50 bps to 4.1%.

International segment revenues decreased 5.2% to $661 million due to unfavorable impact of foreign currency to the tune of 390 bps. The company recorded comparable sales decline of 1.2% in the reported quarter.

The segment’s gross profit dipped 1.8% to $160 million in the reported quarter but adjusted gross margin expanded 80 bps to 24.2%. Adjusted operating income came in at $2 million, narrower than the adjusted operating loss of $1 million in the year-ago quarter.

Other Financial Details

Best Buy ended the quarter with cash and cash equivalents of $1,561 million, long-term debt of $1,193 million and total equity of $3,354 million. In the fiscal first quarter, the company returned about $232 million to its shareholders via buybacks of $98 million and dividends of $134 million. Moreover, it announced to buy back shares worth $750 million to $1 billion in fiscal 2020.

Guidance

Best Buy has reiterated its guidance for fiscal 2020. Management continues to forecast Enterprise revenues of $42.9-$43.9 billion compared with $42.9 billion reported in fiscal 2019. Furthermore, comps are still expected to be up 0.5-2.5%, down from 4.8% recorded in fiscal 2019.

The company anticipates adjusted operating income rate of about 4.6%, flat with the fiscal 2019 level, on a 52-week basis. Meanwhile, it expects an effective tax rate of 24.5%. Adjusted earnings are still anticipated to be $5.45-$5.65 per share.

For the fiscal second quarter, management anticipates Enterprise revenues of $9.5-$9.6 billion and comps growth of 1.5-2.5%. Also, it expects an effective tax rate of 24.5%.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

Currently, 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

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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