Best Buy (NYSE:BBY) has executed a remarkable comeback since being left for dead by investors six years ago. The consumer electronics giant has successfully carved out a niche for itself by holding costs (and prices) down while maintaining a more knowledgeable staff that can offer customers advice about various products.
This strategy continued to pay off in the third quarter, as Best Buy once again surpassed its goals for both sales and earnings per share.
Another successful quarter
Entering the third quarter, Best Buy expected to produce $9.4 billion to $9.5 billion of revenue, with comparable-store sales up 2.5% to 3.5% domestically and 2% to 4% in international markets. Management projected that EPS would come in between $0.79 and $0.84, representing 1% to 8% year-over-year growth.
Instead, revenue reached $9.59 billion. International comps growth of 3.7% was near the high end of the guidance range, and Best Buy's 4.3% domestic comps increase comfortably exceeded management's outlook.
The strong revenue performance helped Best Buy smash its EPS forecast. Adjusted EPS surged 19% to $0.93, 11% above the high end of the guidance range. That also surpassed even the most bullish analysts' earnings estimates. Over the first three quarters of fiscal 2019, adjusted EPS has surged 29% year over year, from $2.06 to $2.65.
Best Buy keeps capitalizing on Sears' woes
Best Buy continued to benefit from Sears Holdings' (OTC:SHLDQ) unraveling last quarter. This has mainly played out through steady increases in its appliance sales.
Last quarter, Best Buy's appliance comps surged 8.4% in the U.S., building on a 13.5% gain a year earlier. Appliance sales made up 11% of Best Buy's domestic revenue for the quarter. This increase was particularly impressive for two reasons. First, Best Buy has now fully lapped the liquidation of electronics and appliances specialist HHGregg in the spring of 2017. Second, the U.S. housing market is slowing.
A wave of store closures by Sears Holdings -- which was still the fourth-largest appliance seller in the U.S. last year -- more than made up for those headwinds. Nearly 100 Sears stores closed over the summer, adding to dozens of closures earlier in the year.
There are more than 100 Sears stores slated to close during the fourth fiscal quarter, putting more market share up for grabs. And there's a good chance that Sears won't survive the bankruptcy process, forcing the closure of its last few hundred stores. Best Buy is well-positioned to cash in on an eventual liquidation of the iconic retailer.
Don't sweat the cautious fourth-quarter outlook
As usual, Best Buy offered a cautious forecast for the current quarter. The fact that the company is going up against an incredible 9% comp sales increase in the prior-year period surely added to management's normal conservative approach.
In any case, Best Buy projects that comps will rise 0% to 3% in both the domestic and international markets. It expects adjusted EPS to reach a range of $2.48 to $2.58, up slightly from $2.42 a year earlier. Tax reform will provide a significant EPS lift, but this will be partially offset by having one less week in the quarter this year. (The fourth quarter of fiscal 2018 had 14 weeks.)
However, as I noted earlier this year, Best Buy almost always beats its forecasts. Indeed, the company's Q3 earnings report was the 11th time in 12 quarters that it described its results as "better-than-expected." Barring a major economic setback in the next few weeks, it's a pretty safe bet that Best Buy will exceed its sales and earnings forecasts for the fourth quarter.
Even with its conservative fourth-quarter outlook, Best Buy was able to boost its full-year EPS guidance by more than $0.10, to a new range of $5.09 to $5.19. This suggests that analysts need to raise their EPS estimates again, as the current consensus sits at just $5.11.