Over the past two years or so, revenue growth has accelerated at Best Buy (BBY -0.81%), following several years of anemic growth. This has allowed the company to return to profit growth, defying skeptics.
Last Thursday, Best Buy reported that revenue growth slowed in the first quarter in the face of a tough year-over-year comparison. Nevertheless, the company was able to improve its profit margin, sending earnings per share soaring. And while Best Buy faces new threats like rising tariffs on Chinese imports, it is now in a strong position to weather these challenges.
Sales growth slows -- but profit surges
Best Buy's comparable sales rose 1.1% last quarter, including a 1.3% increase in the domestic market. This represented a big slowdown compared to Best Buy's recent sales growth trajectory, but the company was facing a very tough comparison, as comp sales rose 7.1% in the prior-year period. Furthermore, Best Buy surpassed its guidance, which had called for comparable sales to rise 0% to 1%. Total revenue inched up 0.4% to $9.14 billion.
Despite this slower growth, Best Buy achieved solid margin expansion in the first quarter. Gross margin ticked up to 23.7% from 23.3% a year earlier, driven by internal initiatives to maximize gross profit and the addition of high-margin revenue from the GreatCall services business, which Best Buy acquired last August. Meanwhile, operating expenses were essentially flat year over year.
The net result was that adjusted EPS surged 24% year over year, from $0.82 to $1.02. This easily surpassed the high end of management's guidance range of $0.83 to $0.88, as well as the analyst consensus of $0.86.
Best Buy delivered strong EPS growth last quarter. Image source: Best Buy.
Two categories are leading Best Buy's growth
Best Buy continued to lean heavily on two of its six official revenue categories to drive its sales growth last quarter: appliances and services. Strength in these categories offset a double-digit comp sales decline in the entertainment category, which is under pressure due to a cyclical downturn in gaming hardware and software sales.
In the domestic market, appliance sales jumped 10.5% in the first quarter, which is typically a seasonally weaker period. In this category, Best Buy is clearly profiting from competitors' woes. Sears -- which sold $3 billion of appliances in 2017 -- has closed more than half of its stores over the past year, barely surviving a brush with bankruptcy. Sears Hometown and Outlet Stores also shrank dramatically last year, closing about a quarter of its stores. And J.C. Penney recently stopped selling appliances after spending three years trying to break back into the market.
The services segment continues to grow as well, with comp sales up 6.8% in the domestic market and 13.4% outside the U.S. last quarter. Best Buy has been driving growth in this category with its Total Tech Support subscription service, which covers customers' technology products whether they were purchased at Best Buy or not.
Best Buy also continues to bulk up to drive growth in the services area. The company recently bought Critical Signal Technologies, which CEO Hubert Joly described as "a senior-focused health services company." That builds on its 2018 acquisition of GreatCall.
Best Buy maintains its outlook despite headwinds
For the second quarter, Best Buy expects sequential acceleration in its sales trend, with comp sales growth of 1.5% to 2.5%. The company's guidance calls for adjusted EPS between $0.95 and $1.00 -- roughly in line with the average analyst estimate of $0.96.
Despite posting strong profit growth last quarter and having a favorable outlook for Q2, Best Buy maintained its full-year forecast for comp sales to rise 0.5% to 2.5% and adjusted EPS to reach a range of $5.45 to $5.65. This guidance now includes the expected impact from a recent tariff increase affecting $200 billion of Chinese imports.
Management acknowledged that as tariffs rise -- and start to affect more products -- it will inevitably impact consumer prices and demand. That said, Best Buy's ability to maintain its full-year forecast despite higher assumed tariffs shows how far the company has come. A few years ago, a headwind like this could have decimated Best Buy's profitability. Today, it's just a minor speed bump for the consumer electronics giant.
