I recently previewed what to expect from Best Buy (BBY) leading up to its July-quarter earnings announcement. My general assertion is that the Minneapolis-based consumer electronics and appliance retailer has positioned itself well in terms of recovering from retail fallout, along with expansion into new markets through acquisitions.
However, Tuesday morning's second-quarter results failed to impress investors. The stock is down despite comp store sales growth that outperformed estimates. Much of the ire seems to be stemming from lower guidance for the third quarter, despite the fact that full-year guidance was actually increased.
Last time I wrote on Best Buy, I suggested that underwhelming results and a subsequent pullback could lead to a buying opportunity. Is this that opportunity?
What's Not to Like?
I couldn't be more pleased with the second-quarter results. The company's total revenues increased 4.9% to $9.38 billion. Domestic revenue was up 4.4% to $8.64 billion, with online revenues growing 10.1% to $1.21 billion. Online sales now represent 14% of the company's domestic business.
This is slower overall online growth than the company has posted in the past. Whether that is a cause for concern is up for debate, though.
Personally, I think there's an equilibrium between brick and mortar/online sales that the market hasn't found yet. Moving past my view that e-commerce is destroying American labor markets, when it comes to Best Buy's earnings, as long as sales go up, I don't really care where they came from.
A critique that could be made is the lower gross profit rate of 23.8%, versus 24.0% a year earlier. The company cited higher supply chain expenses as well as the cost associated with rolling out its revamped tech support offerings.
Internationally, BBY is creating solid growth rates. International revenue advanced 10.8% to $740 million. Though one should note international gross profit rates did slide to 23.1% versus 25.1%. Again, there were high expenses incurred.
Gross profit rates certainly didn't affect the company's ability to increase income. Operating income rose 4.3%, year to year, to $335 million, and a lower overall tax rate helped drive net earnings to $244 million; a 16.7% increase from a year earlier. That income, combined with share reductions, allowed for GAAP diluted earnings per share of $0.86. That's a 28.4% improvement.
It's hard to be mad about those numbers. And yet, the market is pulling BBY stock down.
Too Much Enthusiasm
It appears people had a real problem with the slower online sales growth, as they use Amazon (AMZN) as a barometer for everything these days. Furthermore, the stock ran hard in the past month as momentum and enthusiasm increased for the retailer's strong turnaround. Perhaps there was a little too much enthusiasm, similar to when Macy's (M) reported earnings earlier this month.
Macy's also pulled back off news that its quarterly results weren't literally divine. There's a big difference here, though. Macy's reported relatively flat overall sales. Best Buy reported a comparable sales increase of 6.2%, a higher growth rate than last year's 5.4%. Furthermore, the company raised its full-year guidance.
Non-GAAP fiscal year 2019 earnings are now expected to be $4.95 to $5.10 per diluted share. Let's say they hit $5.00 per share. That would mean the stock is currently trading around 15.48x forward non-GAAP earnings estimates. That's not an absurd valuation for a company that's delivering solid growth.
How I'm Playing the Stock
This might require patience. The market is freaking out over the company's lower expected performance in the third quarter -- at least relative to analyst estimates (those pesky analysts).
If Wall Street does in fact give Best Buy the cold shoulder through the third quarter because of lower guidance of $0.79 to $0.84, I think some big value could open up.
It will pay to watch how this one performs. If Best Buy shares slip through the third quarter, I think BBY is a great stock to buy and ride. Let's remember, Best Buy has a history of beating estimates overall. The company could very well give us a surprise in the third quarter. I wouldn't necessarily bet on that, but it's food for thought.
I think this one will be all about that fourth quarter. The holiday season will be the next catalyst to make or break these retailers.
If the shares do fall more, I'm definitely considering taking a stake. It will be a matter of if the economy can stay strong, and fuel prices can remain tolerable. If that equation stays positive, retail should remain strong.
As an added bonus, I would be remiss if I didn't mention Best Buy's $800 million acquisition of GreatCall will provide the company exposure to an aging American consumer market in a big way. The confluence of tech and convenience, GreatCall's $300 million in annual revenues stem over 900,000 paying subscriptions for its product offerings.
If Best Buy can tap into that consumer base, and creatively implement ties to its current business, I think there's huge potential here. The company's tech squad workers can make house calls for tech problems. Increased utilization of GreatCall's jitterbug smartphone, coupled with its emergency connectivity products, make it a huge revenue area if Best Buy can tap into that senior citizen market.
This is a great long-term story for the company.