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Best Buy Credits an 'Opportunity-Rich' Tech Environment for Lifting Sales in the First Quarter

By Demitri Kalogeropoulos - May 24, 2018 at 3:25PM

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Strong demand for mobile phones and appliances pushed results above management's forecast this quarter.

Best Buy (BBY 2.42%) this week posted surprisingly strong sales growth that management said was driven by robust demand across its consumer tech and appliance categories. The retailer had a few pieces of bad news for investors in this report, including a decline in profitability and slower e-commerce sales gains. But overall the announcement marked a good start to Best Buy's fiscal year.

Here's how the top- and bottom-line figures stacked up against the prior year:

 Metric

Q1 2018

Q1 2017

Year-Over-Year Growth

Revenue

$9.1 billion

$8.5 billion

7%

Net income

$208 million

$188 million

11%

Earnings per share

$0.72

$0.60

20%

Data source: Best Buy's financial filings.

Steady sales and profit growth

Sales gains only slowed modestly from the prior quarter's booming results, while earnings, despite downticks in both gross and operating margins, surged higher thanks to a plunging tax rate. 

Man and woman looking at a TV in a store.

Image source: Getty Images.

A few key highlights of the quarter:

  • Comparable-store sales jumped 7% to far outpace the 1.5% to 2.5% range that management had forecast back in early March. Best Buy's mobile phone segment stood out with a 10% sales spike, and the appliances category also logged double-digit gains. Its entertainment category, which includes drones and video game products, was its weakest and declined slightly.
  • E-commerce sales growth slowed to 12% from an 18% boost in the prior quarter.
  • Gross profit margin in the core U.S. segment dipped slightly to 23.3%. That decrease helped push operating profit margin down to 3.2% of sales from 3.8% a year ago. The international segment reported a modest loss due to higher tech support costs in Canada.
  • Best Buy's 11% net income spike was powered by a plunge in its tax rate to 19% from 36%. Aggressive stock-repurchase spending, meanwhile, allowed earnings to jump 20% on a per-share basis.

Management's comments

"We are happy to report better-than-expected top- and bottom-line results," CEO Hubert Joly said in a press release. The healthy demand trends were "broad-based," he continued, "with positive comparable sales across all channels, geographies and most of our product categories."

Joly credited "healthy consumer confidence, product innovation in multiple areas of technology, and our unique value proposition" with creating a favorable sales background. "We believe we are operating in an opportunity-rich environment driven by technology innovation and customers' need for help," Joly explained.

Looking ahead 

Executives forecast continued growth in the second quarter, in both the domestic and international segments. At the same time, Joly and his team cautioned that expenses are set to rise as the company pours resources into management's strategic initiatives, which include a bulked-up supply chain and more-comprehensive tech support.

Even though the retailer blew past its growth forecast for the first quarter -- and expects sales gains of between 3% and 4% in the second quarter -- executives declined to update their full-year target of 2% comps. The steady outlook doesn't mean that Best Buy is expecting a sharp slowdown ahead, though. Instead, it reflects a cautious forecasting approach given that it is still early in the year.

Investors appeared to focus on that cautious outlook, and the potential for rising costs, as they sent Best Buy shares lower immediately following the results. But the stock price drop likely has more to do with the retailer's big gains over the past three years rather than any growing concern that operating trends are about to turn lower.

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