Best Buy Posts Strong Earnings Just In Time For Black Friday: The Sell-Side Reacts

Retailer Best Buy Co., Inc. BBY reported better-than-expected third-quarter earnings Tuesday, driven by strong comps, improved services and significant same-store sales increases.

The Analysts

Piper Jaffray analyst Peter Keith reiterated an Overweight rating on Best Buy and lowered the price target from $87 to $81.
KeyBanc Capital Markets analyst Bradley Thomas maintained a Sector Weight rating.
Raymond James analyst Dan Wewer reiterated a Strong Buy rating and lowered the price target from $90 to $85.

Q3 Highlights

Best Buy reported earnings of 93 cents per share against a consensus estimate of 85 cents, and a total sales increase of 2.9 percent.

“Domestic comps for the quarter decelerated on a one-year basis, but accelerated on [a] two- and three-year [basis]. From a merchandising perspective, BBY generated strong comp growth from mobile phones, gaming, appliances, wearables, headphones and smartphones,” said KeyBanc's Thomas.

These drivers were offset by declines in the tablet category, the analyst said. Best Buy's operating margin decreased 19 basis points, and the gross margin declined by 23 basis points, he said.

Services

Best Buy noted positive results from both Total Tech Support and GreatCall, said Raymond James' Wewer.

The acquisition of GreatCall should hold further benefits for Best Buy, the analyst said.

“Best Buy closed its acquisition of GreatCall, Inc. for $792 million in net cash on Oct. 1. GreatCall is a connected health technology company that provides easy-to-use products — primarily focusing on the elderly population while offering great value propositions."

Raymond James expects an acceleration in service revenue in 2020 as Best Buy invests in three key initiatives Wewer said.

They are:

Smart home management, a $31-billion market growing by 15 percent annually.

Assured Living, a $28-billion market growing by 20 percent annually.

Total Tech Support.

Q4 Outlook

Piper Jaffray's Keith said he expects strength in the television and gaming sectors in Q4.

“Management also cited smartphones, wearables, small appliances, and security as items expected to do well over the holidays."

A 50-basis point-plus comp benefit is expected in Q4 from the calendar shift, while a flat gross margin is anticipated despite 50 basis points of supply chain pressure and a smaller profit sharing pressure, the analyst said.

The implications of the partnership with Amazon.com, Inc. AMZN and Apple Inc. AAPL are not clear due to Amazon’s impact on the sale of Apple products, Keith said.

“AMZN will now become a first-party seller of iPhone, iPads, Apple Watches and some accessories. However, AMZN will also be significantly reducing the number of third-party sellers — particularly around iPhones and watches."

Best Buy cited a best-in-class ability to sell Apple products and said mobile phones transactions are difficult online, according to Piper Jaffray.