Consumer electronics retailer Best Buy (NYSE:BBY) is set to report its third-quarter results before the market opens on Tuesday, Nov. 20. The company expects another solid quarter, although revenue and earnings growth will likely slow down. Best Buy's outlook will come against a backdrop of tariffs and slumping demand for iPhones, both of which could cause problems for the retailer.

What happened last time

Best Buy's second quarter was solid, with the retailer handily beating analyst estimates for both revenue and earnings. Comparable sales soared 6.2% on top of a 5.4% increase in the prior-year period.

Metric

Q2 2019

Change (YOY)

Compared to Average Analyst Estimate 

Revenue

$9.38 billion

4.9%

Beat by $100 million

Non-GAAP earnings per share

$0.91

31.9%

Beat by $0.08

Data source: Best Buy. YOY = year over year.

Best Buy raised its full-year outlook thanks to this strong performance. The company now sees full-year comparable sales growth between 3.5% and 4.5%, up from a previous range of 0% to 2%. Full-year non-GAAP earnings per share are now expected to land between $4.95 and $5.10, compared to previous guidance of $4.80 to $5.

The only part of Best Buy's second-quarter report that didn't impress was the company's online results. Domestic online sales rose just 10.1% year over year, down from 31.2% growth in the prior-year period. Best Buy CEO Hubert Joly explained the company's online strategy during the earnings call: "While we are, of course, focused on continuing to drive online revenue, we are more and more focused on how to build deeper relationships and drive total revenue from customers."

Building customer loyalty is higher on Best Buy's list of priorities than going after one-off online sales. That should pay off in the long run, even if it depresses the company's online sales growth in the near term.

A Best Buy storefront.

Image source: Best Buy.

What analysts are expecting

Best Buy doesn't expect its third quarter to be quite as impressive as its second quarter. The company's guidance calls for revenue between $9.4 billion and $9.5 billion, comparable sales growth between 2.5% and 3.5%, and non-GAAP earnings per share between $0.79 and $0.84. Analysts are a bit more optimistic:

Metric

Average Analyst Estimate

Change (YOY)

Revenue

$9.57 billion

2.7%

Non-GAAP earnings per share

$0.85

9%

Data source: Yahoo! Finance.

Near-double-digit earnings growth is nothing the sneeze at, especially considering that Best Buy faces intense competition from big-box stores like Walmart and Target, as well as 800-pound online gorilla Amazon. But it's a far cry from the bottom-line growth Best Buy put up in the second quarter.

Tariffs and iPhones

Best Buy will face a couple of major headwinds this holiday season and possibly beyond. The first is the escalating trade war between the U.S. and China. Some appliances were caught up in the first round of U.S. tariffs: Appliance maker Whirlpool has warned about tariff-related costs of $350 million this year. Appliances accounted for 12% of Best Buy's revenue in the second quarter.

The latest batch of tariffs on $200 billion of products includes some consumer electronics. The tariff rate is currently 10% but is set to rise to 25% next year. Another round of tariffs of equal size would cover nearly all remaining Chinese imports and necessarily hit more product categories that Best Buy sells.

Best Buy hasn't felt much of an impact so far, but that could quickly change. Higher prices could start knocking down demand, derailing the company's growth. Joly said during the second-quarter earnings call that products with higher gross margins would see a lower price increase related to tariffs, which should minimize the impact to both consumers and Best Buy's bottom line in those cases. But Best Buy will still feel some pain if this trade dispute isn't resolved soon.

Beyond tariffs, slumping demand for Apple's iPhones could pose a problem for Best Buy. Following a string of slashed outlooks from Apple suppliers, The Wall Street Journal reported this week that Apple had cut production orders for all three of its new iPhone models. On top of potentially lower iPhone sales, this weak demand could have a multiplier effect by hurting store traffic and knocking down sales of accessories, phone plans, and other related products.

At this point, all of this is hypothetical. Best Buy just raised its full-year outlook, and the company has historically been quick to point out headwinds, at least since Joly took over in 2012. The stock has tumbled since peaking a few months ago, down about 22% from its high, so the market may already be pricing in the possibility of less-than-stellar guidance.

There's a cloud of uncertainty hanging over Best Buy. Investors will know more on Tuesday morning.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Timothy Green owns shares of Whirlpool. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.