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Earnings Preview: BBY and ‘Building The New Blue’

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November 15, 2017
Person testing a smartphone at a retail store
istockphoto.com/mihailomilovanovic

Best Buy (BBY) reports third-quarter fiscal 2018 earnings before the opening bell on Thursday, November 16. Despite the doom-and-gloom picture many are painting for the retail sector overall, there are quite a few names that have outperformed the broader indexes. So far this year, BBY has been one of them.

When it releases third-quarter results, BBY is expected to report adjusted earnings per share (EPS) of $0.79, up from $0.62 in the prior-year quarter, on revenue of  $9.35 billion, according to third-party consensus analyst estimates. Management previously issued guidance saying they expect revenue between $9.3 billion and $9.4 billion, and comp sales growth (growth at stores open for a year or more) ranging from 4.5% to 5.5%.

In last quarter’s report, adjusted EPS came in at $0.69, beating analyst estimates of $0.63, on revenue of $8.94 billion, also beating analyst estimates of $8.66 billion. BBY reported comp sales increased 5.4% and domestic online sales grew 31.2% on a comparable basis to $1.1 billion.               

After the better-than-expected results, management upped their guidance for the full fiscal year and said they expect revenue growth of approximately 4%, up from previous guidance for a 2.5% increase. 1.5% of that 4% growth estimate is a result of an extra week in the fiscal year, according to BBY. CEO Hubert Joly dumped a little cold water on the quarter’s results by saying “while we do not believe the mid-single-digit comps are a new normal, we’re excited about our opportunities going forward and the strategy we’re pursuing.”

Earlier this year, management announced it was done with its “Renew Blue” strategy, having achieved the targets they set out in that plan, and was moving on to “Best Buy 2020: Building The New Blue”. In September, BBY hosted an investor day where it further detailed the new strategy and issued long-term financial goals it is targeting by the end of fiscal 2021.

The new strategy is "designed to take advantage of key growth opportunities by expanding what the company sells and evolving how it sells,” according to the company. Management highlighted three examples of how they intend to expand what they sell: build a leading position in the smart home market, piloting a service that provides technology solutions for adult children to check in on aging parents, and launching Total Tech Support, a new offering through Geek Squad.

By the end of fiscal 2021, BBY has said it is also targeting a plan to drive an incremental $600 million in cost savings, on top of $1.4 billion they had saved over the past five years, and use that savings to help fund investments and offset competitive pressures.

As analysts and investors digest this quarter’s report, they’ll likely be focused on guidance for the fourth quarter, typically the busiest time for most retailers. So far this earnings season, there have been several retailers that posted better-than-expected earnings, but their shares still dropped due to lower-than-expected guidance for the holiday quarter. The headline numbers can result in quick price moves, but just as quickly, management’s guidance and comments on earnings calls can reverse them.

Stock chart showing Best Buy (BBY) YTD performance compared to the S&P 500 and S&P Retail Sector

FIGURE 1: BEST BUY YTD PERFORMANCE.

Best Buy (BBY) is up 33.77% year-to-date, outpacing the S&P 500’s (SPX) 14.22% increase, charted as the pink line, and the S&P Retail Select Sector Index’s (SPSIRE) 10.28% decline, charted as the teal line. Since mid-May, shares have seen some pretty big swings. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Best Buy Trading Activity

While BBY is up 33.77% year-to-date, the stock has been prone to big swings since the end of May, when it gapped up after reporting a surprise increase in sales in the first quarter. Shares dropped significantly after reporting second-quarter earnings, despite the company’s better-than-expected results. Ahead of that report, the stock was close to its all-time high of $63.32. By the end of trading the day it released results, shares were at $55.02.

BBY had recovered to the high-$50 range, but dropped back to the low-$50s after the company unveiled long-term financial targets and other initiatives at its investor day in mid-September. Shares have since climbed back a bit and closed at $57.20 yesterday.

Around BBY’s upcoming earnings release, options traders have priced in about a 8% potential stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. In short-term options trading at the November 17 expiration, calls have been active at the 57.5 and 60 strike prices, and puts have been active at the 55 and 57.5 strikes. Implied volatility is at the 96th percentile as of this morning. Looking further out at the December monthly expiration, there’s been heavier volume in recent trading at the 52.5-strike put, and open interest is currently at 12,567 contracts.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

Wal-Mart (WMT) also releases its earnings tomorrow morning, wrapping up the last of the major retailers to report this season. Next week, Deere (DE) reports fourth-quarter earnings and closes out its fiscal year. As earnings season comes to an end, Washington’s progress on tax reform and economic data are likely to be some of the primary market drivers until the next round of earnings kicks off in January. If you have time, make sure to check out today’s market update to see what else is happening.

Good Trading,
JJ
@TDAJJKinahan

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