Can Best Buy's (BBY) 2020 Plan Aid Growth Amid Soft Margins?

Shares of Best Buy Co, Inc. (NYSE:BBY) have not only declined but also underperformed the industry in the past six months. This Zacks Rank #3 (Hold) company has lost 27.2% in the said time frame compared with the industry’s decline of 24.6%. This decline can be attributable to soft margins, owing to the increasing SG&A costs trend for a while now.

Higher cost of investments to boost e-commerce operations and supply-chain activities have been weighing on Best Buy’s margins. Notably, SG&A expenses have increased 3.6% in third-quarter fiscal 2019, which led to operating margin contraction of 20 basis points (bps) to 3.5%. Moreover, SG&A expenses grew 2.6% and 6.3% in the second and first quarters of fiscal 2019, respectively. The company’s margin is expected to remain under pressure in the near future.

Despite these downsides, the company’s extensive investments to upgrade operations, with special focus on developing omni-channel capabilities, stores, supply chain, new business initiatives, cost-reduction opportunities and strengthening partnership with vendors bode well. The company continues to invest in improving its In-Home Advisor program and expanding the Total Tech Support members to boost customers’ experience. In fact, management concluded the buyout of GreatCall, a major connected health technology company, in a bid to offer unique solutions to aging customers.

Further, Best Buy has launched a strategy called “Best Buy 2020: Building the New Blue”, following the successful completion of “Renew Blue” program. Under this new strategy, the company is focused on exploring and pursuing growth opportunities, better execution in key areas, cost optimization and investing in people as well as systems to drive growth. With regard to cost savings and increasing productivity, management targets $600 million of cost reduction by fiscal 2021, out of which the company has already accomplished $465 million.

Moreover, Best Buy is leaving no stone unturned to attract consumers and attain incremental revenues via the store-in-a-store concept. The company is concentrating on enhancing mobile phone category in its big-box stores and online, under its Mobile 2020 strategy.

Additionally, Best Buy continues with its impressive surprise history, having surpassed earnings and sales estimates for four straight quarters. Both the top and bottom lines improved year over year in the quarter. While earnings were driven by higher sales and lower tax rate, sales benefited from comparable sales growth of 4.3% and Building the New Blue initiative.

Following the robust third-quarter results, management raised guidance for fiscal 2019. Best Buy anticipates Enterprise revenues of $42.5-$42.9 billion, up from the prior projection of $42.3-$42.7 billion. Further, comps are expected to grow 4-5% for the fiscal year, up from the prior guided range of 3.5-4.5%. Adjusted earnings per share are envisioned to be $5.09-$5.19, which reflects growth of about 15-17% from $4.42 earned in fiscal 2018. For the fiscal fourth quarter, management anticipates Enterprise revenues between $14.4 billion and $14.8 billion, and comps to be flat to up 3%. Management projects adjusted earnings per share of $2.48-$2.58, up from $2.42 recorded in the year-ago period.

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