All things considered, Best Buy's (NYSE:BBY) second-quarter results were solid. Comparable sales rose by 1.6%, domestic online sales soared 17.3%, and adjusted earnings per share shot up 18.7%. The consumer electronics retailer also raised its earnings guidance for the full year, a surprise given the backdrop of tariffs and increasing recession fears.

These results weren't enough, though; shares of Best Buy were down around 10% Thursday morning. Here's what investors need to know.

Margins on the rise

Best Buy's revenue growth was sluggish in the second quarter, falling a bit short of analyst expectations. But the bottom line came in ahead of estimates, boosted by an improved gross margin.

Metric

Q2 2020

Change

Compared to Average Analyst Estimate

Revenue

$9.54 billion

1.7%

Missed by $10 million

Non-GAAP earnings per share

$1.08

18.7%

Beat by $0.09

Data source: Best Buy.

In the U.S., comparable sales rose 1.9% year over year. That's a substantial slowdown compared to the 6% growth Best Buy reported in the prior-year period. The international business didn't fare as well, with comparable sales slumping by 1.9%.

Appliances and services were the strongest categories for Best Buy in the U.S. Comparable appliance sales jumped 14% year over year, while comparable service sales rose 10.7%. Growing the services business is a key part of Best Buy's long-term growth strategy. During the quarter, the company grew its Total Tech Support membership and added additional In-Home Advisors.

Earnings growth was driven by higher revenue and an improved gross margin. Adjusted gross margin in the U.S. expanded by 20 basis points to 24%, while the same metric jumped 70 basis points to 23.8% in the international business. Growth in the services business fueled this gross margin expansion, and Best Buy pointed to its GreatCall acquisition in particular as a profitability booster. GreatCall is best known for its Jitterbug devices and the associated subscription services.

Two people looking at TVs.

Image source: Getty Images.

Higher earnings this year but plenty of uncertainty

Best Buy now expects to produce adjusted earnings per share between $5.60 and $5.75 in fiscal 2020, up from a previous guidance range of $5.45 to $5.65. This boost reflects better-than-expected earnings in the second quarter.

On the revenue front, Best Buy narrowed its guidance range while reducing the high end. The company now sees full-year revenue between $43.1 billion and $43.6 billion, compared to a previous range of $42.9 billion to $43.9 billion.

Best Buy's guidance takes into account the company's best guess as to how tariffs will impact its results in the second half, as well as heightened uncertainty over customer buying behavior. Some of Best Buy's products are impacted by 30% tariffs, while others will be hit by 15% tariffs set to go into effect on Sept. 1 and Dec. 15.

It's unclear how much of the tariff-driven cost increases Best Buy will pass off to consumers and to what degree higher prices will reduce demand for consumer electronics. Given the uncertainty, Best Buy's guidance should be viewed as a guess.

Best Buy is performing a lot better than many other retailers right now, but tariffs will start to play a much bigger role starting in September.