Are Tariffs Holding Back the Potential for Best Buy? – TheStreet.com

Best Buy (BBY) stock is getting some chatter after beating estimates in the fiscal first quarter 2020. Despite the surprise results, the stock was down around 4% in early trading. After reviewing these results, I view Best Buy as a solid “hold.”

Comp sales improved again, while online sales garnered strong percentage rate growth. At the same time, comp sales growth slowed significantly year over year. With reiterated guidance for the fiscal year 2020, despite the Q1 strength, I think Best Buy remains a good stock to own, but not accumulate.

First-quarter revenue beat estimates and narrowly increased year over year. Q1 revenue were $9.14 billion vs. $9.11 billion a year ago. Total comparable-store sales increased 1.1%, as opposed to 7.1% in fiscal Q1 2019.

This is the area of concern for me. Comp sales are slowing. Domestic comp sales increased 1.3% vs. 7.1% a year ago. Internationally, comp sales actually declined 1.2% vs. growth of 6.4% in fiscal Q1 2019. The shining light within the entire enterprise is online sales. Domestic online revenue increased 14.5% to $1.31 billion. E-commerce represented 15.4% of domestic sales — a 180 basis point increase year over year.

In conjunction with the slight improvement in revenue, gross profit rates increased slightly to 23.7% of revenue vs. 23.3% a year ago. Operating income of $334 million marked an improvement in operating margins — which rose to 3.7% vs. 2.9%. Net income of $265 million marked a 36% increase in earnings on a per share basis. Diluted earnings per share were $0.98.

Best Buy is doing well increasing tech services revenue. In its earnings release, management explained that the effects of the acquisition of “GreatCall” have been good for domestic gross profits, as it is a higher-margin business. I liked the service back when they made the acquisition, as it provides health and safety solutions for older Americans. This area of business seems likely to only improve as America ages. They also noted there have been improvements to product margin rates that have been canceled out a bit by higher supply chain costs.

Looking forward, Best Buy reiterated its previous guidance for the full year, thanks in part to the estimated effects that the new increase in tariffs between the United States and China will have on the business. The company expects full-year 2020 revenue of $42.9 billion to 43.9 billion. On the conservative end, that revenue would mark virtually little change over fiscal 2019’s full year revenue of $42.88 billion. On the liberal end, Best Buy is forecasting revenue growth of 2.37%.

BBY is forecasting full-year comp sales growth of 0.5% to 2.5%. That is weaker overall in comparison to FY 2019 comp sales growth of 4.8%. Non-GAAP earnings are expected to be in the range of $5.45 to $5.65 per diluted share. That would mark an improvement over FY 2019 earnings of $5.32 per diluted share.

I think a lot is up in the air. Best Buy had a strong start to the year, but the effects of tariffs are casting an unclear picture. If a deal were to be struck, perhaps there is more upside than previously expected. If the negotiations drag on, it doesn’t seem like the stock has much to drive it past a certain degree.

BBY is currently trading at roughly 11.7x full-year earnings. When looking at historical P/E ratios, that’s right in the range of where this has been trading. There is some upside potential, but based on today’s reaction, investors aren’t super impressed. I reiterate my view that Best Buy is currently a “hold.”

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