Best Buy Shares Drop Despite Strong Q3 Earnings

By Duncan Ferris

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Best Buy may have beaten expectations for earnings and revenue, but investors seem concerned that the retailer's declining product margins could spell trouble.

Best Buy sells consumer electronics, videogames and music

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Best Buy (NYSE: BBY) shares took a double-digit hit on Tuesday dropping by 12% as its product margins declined. The retailer reported earnings ahead of expectations but warned that supply issues and crime had been issues in the third quarter and showed no signs of abating.

Ahead of the all-important festive season, Best Buy appears to have lost the confidence of some investors.

What did Best Buy’s earnings show?

Overall revenue was higher than anticipated, coming in around $330m over expectations at $11.91bn.

Sales from the company’s domestic and enterprise segments increased by 2% and 1.6% respectively, on top of growth of more than 20% in the same period last year. However, online and international sales decreased, falling by 10.1% and 3% respectively.

Earnings per share for the period was ahead of expectations, coming in at $2.08. This compared to analyst projections of $1.91.

However, Best Buy forecast fourth quarter revenue of between $16.4bn and 16.9bn. This is lower than analysts had expected.

This comes amid concern that, with many COVID-related restraints now lifted, consumers will spend their money on leisure and holidays, rather than the technology and entertainment goods offered by chains like Best Buy.

However, it appears that declining margins might be the reason behind the company’s dropping share price.

What margin issues Best Buy face?

Best Buy’s domestic gross profit rate was 23.4%, compared with 24.0% last year. This was largely attributed to lower product margin rates. 

Lower profit margin rates during the third quarter were ascribed to lapping lower levels of promotions and product damages. Additionally, the company highlighted inventory shrink as a headwind faced by the business.

CEO, Corie Barry, explained that the company had been encountering more “organized retail crime” at its stores. She commented that the retailer was looking at ways to secure its products without interfering with customers’ experiences, adding that security staff had been hired at some locations.

She also expressed concern about the harm stealing and unruly behaviour in-store could have on both staff and customers.

Barry said: "This is traumatizing for our associates and is unacceptable. We are doing everything we can to try to create as safe as possible environments."

Additionally, supply issues continue to be an obstacle for the company.

Areas currently being affected by supply issues include appliances, gaming, and mobile phones. Best Buy said it did not believe the issue was materially limiting its sales figures and that it had been an issue for some goods, such as games consoles, since early in the pandemic.

Looking ahead to the busiest period of shopping, Best Buy emphasised that every holiday season brings supply challenges.

What did the CEO say?

Barry commented:

“We delivered record Q3 results, including 2% Domestic comparable sales on top of 22.6% last year, as our leaders continued to drive new ways of operating and our employees continued to do amazing things to support our customer’s technology needs in knowledgeable, fast and convenient ways.

“Our omni-channel capabilities and our ability to inspire and support across all of technology in a way no one else can means we are uniquely positioned to seize the opportunity in this environment and in the future.”

She added that digital sales were

“still more than double pre-pandemic levels” even as customers were returning to stores.

“During the third quarter, we reached our fastest small-package online shipping times ever as our same-day delivery was up 400% and we nearly doubled the percent of products delivered within one day compared to last year.”

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Topics:
Computer and Electronics Retail
Gaming
Quarterly Earnings
Industries:
Consumer Discretionary
Companies:
Best Buy

Author: Duncan Ferris

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Duncan Ferris does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Duncan Ferris has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.