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Best Buy Stock Surges 14% After Another Big Earnings Beat

By Adam Levine-Weinberg – Updated Apr 10, 2019 at 11:18AM

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Investors shouldn't be surprised that Best Buy continues to surpass its sales and earnings targets.

Shares of Best Buy (BBY -1.20%) rocketed higher last week, after the consumer electronics giant reported strong results for the final quarter of fiscal 2019. As usual, the company beat its guidance last quarter. It also offered a solid outlook for fiscal 2020.

Best Buy stock ended with a 14% gain on Wednesday, but it remains more than 15% below the all-time high it reached last summer. Let's look at Best Buy's quarterly performance -- and whether the company has what it takes to reach new highs in the coming year.

A great end to a great year

Last quarter, Best Buy generated $14.8 billion of revenue, down from $15.4 billion a year earlier. However, there was an extra week in the fourth quarter in the year-ago period. In addition, Best Buy closed all of its small-format Best Buy Mobile stores last spring. Thus, despite the drop in total sales, comparable-store sales rose 3% in the fourth quarter. That met the high end of management's forecast for 0% to 3% comp sales growth.

This solid top-line performance led to even better results on the bottom line. Adjusted earnings per share reached $2.72, up from $2.42 a year earlier. That easily beat management's $2.48 to $2.58 guidance range and the average analyst estimate of $2.57, powering Best Buy stock's rally.

The exterior of a Best Buy store

Best Buy cruised past its EPS forecast in the fourth quarter. Image source: Best Buy.

For the full year, Best Buy reported 4.8% comp sales growth, while adjusted EPS surged 20% year over year to $5.32. For comparison, Best Buy's initial guidance for fiscal 2019 called for 0% to 2% comp sales growth and adjusted EPS between $4.80 and $5.00.

Check out the latest earnings call transcript for Best Buy.

Growth all around, but particularly in appliances and services

In the domestic market, which accounts for more than 90% of Best Buy's revenue, the company posted comp sales growth across every merchandise category. Comp sales inched up 1.2% for computing and mobile phones, despite a slowdown in the smartphone market. Comp sales rose 2.9% and 2.7% in the consumer electronics and entertainment categories, respectively, roughly in line with the corporate average. The latter result was particularly impressive, because of a tough year-over-year comparison, but the surging popularity of Fortnite boosted sales of game consoles and peripherals.

However, the strongest growth came in the appliances and services categories. Appliances posted an 8.5% comp sales gain on top of a 20.7% increase a year earlier. Best Buy continues to capitalize on Sears' woes. There's more opportunity there, as Sears operated nearly 500 full-line stores as recently as August 2018 but will have just 223 stores by the end of next month. Furthermore, J.C. Penney recently decided to stop selling appliances, which will put additional market share up for grabs over the next year.

Meanwhile, comp sales surged 13.7% in services. While services still represent just 4% of Best Buy's revenue, the company is emphasizing growth in this high-margin category. So far, its efforts appear to be working.

Can Best Buy stock keep rising?

Best Buy's initial guidance for fiscal 2020 calls for 0.5% to 2.5% comp sales growth. Adjusted EPS is expected to rise 2% to 6% to a range of $5.45 to $5.65.

Based on the midpoint of that guidance range, Best Buy stock trades for 12.4 times forward earnings. That seems like a fair price, in light of the company's modest projected EPS growth. But if you consider the fact that Best Buy has routinely beaten its forecast in recent years -- last year, adjusted EPS exceeded the high end of management's initial guidance range by more than 6% -- Best Buy stock looks quite cheap.

Best Buy is well positioned to beat its earnings forecast again this year, thanks to share gains in the appliance market and growing benefits from its services growth initiatives. Another year of double-digit EPS growth may even be within reach. That could continue to push Best Buy stock higher in 2019.

Adam Levine-Weinberg owns shares of J.C. Penney. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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