Q1 Earnings Preview: Watch out for guidance update from Best Buy amidst ongoing trade war

Best Buy’s (BBY) stock has surged 29% this year as the retail chain’s Q4 results came in better-than-estimates. Last month, the company announced that Corie Barry, CFO would be replacing Hubert Joly as CEO from June.

It’s worth noting that Joly has been instrumental in the turnaround of the firm, which was struggling with dwindling sales due to intense competition from the likes of Amazon. The retailer is scheduled to report its first-quarter results on May 23 before the bell.

Investors would be expecting updates from the management about the leadership transition and its future course of action. They would be cautiously watching this move as it’s coming at a crucial time for the firm to continue the momentum from Joly’s illustrious tenure at the helm.

Tariff Impacts

The most important update watched by shareholders on Thursday would be on the fiscal year guidance. Earlier this month, US hiked its tariffs from 10% to 25% for $200 billion worth of Chinese goods. With the 15% increase

in tariffs, investors would be wondering about the repercussions on this to Best Buy, which might result in the contraction of fiscal sales outlook. Last year, approximately 51% of goods were purchased from five suppliers: Apple, Samsung, Hewlett-Packard, Sony, and LG, with all of them expected to have a production base in China.

Last quarter, the retailer has guided full-year revenues to be between $42.9-43.9 billion and adjusted EPS in the range of $5.45-5.65. For the same period, street is expecting top line of $43.56 billion and non-GAAP earnings of $5.66 per share. Any scale back in outlook would indicate that retailers like Best Buy and its peers would have muted results for the rest of the year.

Q1 Expectations

For the first quarter, Best Buy expects revenue of $9.05-9.15 billion and adjusted earnings of $0.83-0.88 per share. On the flip side, analysts are anticipating sales of $9.13 billion and non-GAAP EPS of $0.86. With no major headwinds in the first quarter, Best Buy is expected to continue its solid performance from the last quarter.

One of the key metrics to watch is comp-store sales growth. The retailer has been seeing declining sales growth in the last three quarters. Last year, Q1 same-store sales grew by 7.1%. It would be interesting to see whether the company is able to reverse the trend as it’s tough to match last year’s stats because of tough comps.

To protect itself from the ecommerce onslaught of giants like Amazon (AMZN) the retailer has pivoted itself to offer services from selling products. This strategy is expected to bring in recurring revenues along with improved margins compared to product sales. Along those lines, last October the company bought GreatCall for $800 million, the biggest deal in its history which helped its foray into healthcare services.

On the flip side, the intense competition from e-commerce players, the ongoing trade wars and slowdown in the consumer spending could hurt growth despite the ongoing cost-cutting efforts.

Last quarter, Best Buy reported top and bottom line beat, backed by the strong holiday season. Reduction in expenses aided GAAP earnings increase of 119% to $2.69 per diluted share, while adjusted EPS rose 12% to $2.72.

Apart from Best Buy, retailers like Home Depot, JCPenney, Kohl’s, Nordstrom, Target, Lowe’s, Lbrands and Ross Stores are reporting their earnings this week.

Investors would be keeping a close eye on all the retailers and look for management insights about the emerging retail landscape and the impact they would have due to the ongoing trade wars.

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