Best Buy Company, Inc. BBY returned to positive earnings trend in fourth-quarter fiscal 2018 after reporting a miss in the preceding quarter. With this, the company has delivered a positive earnings surprise in 20 of 21 quarters. Moreover, the company surpassed sales estimates in the fourth quarter, which marked its third beat of the last four quarters.

The company’s solid results followed its announcement of closing 250 small mobile phone stores in the U.S. malls, which boosted investor sentiment. Sources revealed that the closures were announced to boost profitability and restore business in a competitive environment. The company expects to close down these stores effective May 31.

Driven by the solid results, the company’s shares surged as much as 4.6% in the pre-market trading session. Moreover, this Zacks Rank #2 (Buy) stock rallied nearly 20% in the last three months, outperforming the industry’s growth of 14.7%.

The company posted adjusted earnings per share of $2.42 from continuing operations, surpassing the Zacks Consensus Estimate of $2.05. Moreover, the bottom line increased 25% year over year, which came as a big boost to investors.

Best Buy Co., Inc. Price, Consensus and EPS Surprise

Best Buy Co., Inc. Price, Consensus and EPS Surprise | Best Buy Co., Inc. Quote

The top line increased nearly 14% year over year to $15,363 million and beat the consensus mark of $14,570.4 million. Enterprise comparable-store sales (comps) were up 9% against a decline of 0.7% reported in the prior-year period.

Comps growth mainly came on the back of smooth execution of the Best Buy 2020 Strategy, alongside improved product availability, rising consumer confidence and a favorable macro environment, a strong gaming category and a constructive competitive backdrop. Favorable comps in turn aided top and bottom-line performances.

Adjusted operating profit came in at $982 million, up 10.3% year over year. However, adjusted operating margin contracted 20 basis points to 6.4% due to an operating margin decline in the Domestic segment, which contributes nearly 90% of the company’s profitability.

Segment Details

Domestic segment revenues gained 13.4% year over year to $13,987 million, primarily owing to a 9% increase in comparable sales and contribution from the additional 53rd week. This was partially offset by a revenue loss from the shutdown of 18 large-format stores. Comps gained from growth across most categories, with particular strength in mobile phones, gaming, appliances, smart home, wearables and home theater.

Domestic comparable-online sales grew 17.9% to $2.8 billion. This upside was driven by an increase in average order value and conversion rates.

The segment’s adjusted gross profit rose 13.2% to $3,113 million, while adjusted gross margin came in at 22.3%, flat year over year. Adjusted operating income jumped 10.9% to $897 million. However, adjusted operating income margin contracted 20 bps to 6.4%.

The lower operating profit rate can be attributed to higher SG&A expenses that stemmed from a rise in incentive compensation expense at stores and for corporate employees due to strength witnessed throughout the year. Further, ongoing investments in business growth also led to a rise in SG&A expenses.

International segment revenues climbed 20.3% to $1,376 million, primarily on the back of a 9.9% rise in comparable sales growth both in Canada and Mexico, a favorable foreign currency impact of 580 bps and nearly $45 million contribution from the additional week.

The segment’s adjusted gross profit grew 9.6% to $308 million in the reported quarter and adjusted gross margin contracted 220 bps to 22.4%. Adjusted operating profit came in at $85 million, up 4.9% from $81 million reported in the year-ago quarter. Adjusted operating income margin came in at 6.2%, down 90 bps.

Other Financial Details

Best Buy ended fiscal 2018 with cash and cash equivalents of $1,101 million, long-term debt of $809 million and total equity of $3,612 million. In the fiscal fourth quarter, the company returned about $965 million to shareholders via buybacks of $866 million and dividends of $99 million.

Concurrent to the earnings release, the company raised its quarterly dividend rate by 32% to 45 cents per share. It also approved a share repurchase plan worth nearly $1.5 billion for fiscal 2019. This represents an updated two-year buyback plan of $3.5 billion, following the $3 billion plan announced at the start of fiscal 2018.

Guidance

Following the solid close to fiscal 2018, Bets Buy provided an encouraging view for the first quarter and fiscal 2019. For fiscal 2019, management forecasts Enterprise revenues of $41-42 billion, with comps growth of nearly flat to up 2%. The company anticipates adjusted operating income rate of about 4.5%, flat with the fiscal 2018 level. Meanwhile, the company expects an effective tax rate of nearly 25% and earnings per share in the range of $4.80-$5, reflecting growth of about 9-13% from fiscal 2018.

For first-quarter fiscal 2019, management anticipates Enterprise revenues between $8.65 billion and $8.75 billion, and a comparable sales increase of 1.5-2.5%. Management also projects adjusted earnings in the band of 68-73 cents a share.
  
Also, in the fiscal first quarter, the company expects domestic comparable sales to rise in the range of 1.5-2.5%, while international comparable sales are estimated in the band of flat to up 3%.

Further, the company updated its fiscal 2021 adjusted earnings per share target to $5.50-$5.75, reflecting the benefits of the new tax reform.

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American Eagle delivered an average beat of 2.6% in the last four quarters and has a long-term earnings growth rate of 5.5%.