Will Best Buy be Able to Replicate '17 Performance in 2018?

Best Buy Co., Inc.‘s BBY extensive investments to upgrade operations with special focus on developing omni-channel capabilities, strengthening partnership with vendors and strategic initiatives bode well. These efforts helped the stock to gain 53.6% in a year, outperforming the industry’s growth of 45%. While these factors inspire optimism, intense competition and increase in spending, which might hurt margins are dampeners. Let’s delve deeper.

Hidden Catalyst

The Zacks Rank #3 (Hold) company’s Renew Blue program, which was announced in November 2012 aided it to overcome two major problems, “negative comparable sales and declining operating income rate”. The strategy aided the company to deliver compounded annual adjusted earnings growth rate of 8% in the past five years.

Following the successful completion of “Renew Blue” program, the company has launched a fresh strategy called “Best Buy 2020: Building the New Blue”. Fiscal 2018 is the first year of Building the New Blue initiative implementation by the company. Under this strategy, the top most priority for fiscal 2018 is exploring and pursuing growth opportunities, better execution in key areas, cost optimization and investing in people as well as systems to drive growth. Under the program, the company has already achieved the cost reduction target of $450 million. The company targets $600 million of cost reduction and gross profit optimization by 2021. The company has already accomplished $100 million of the projected target.

Earlier, Best Buy raised fiscal 2018 view following the third-quarter results. Management now envisions Enterprise revenue (including 53rd week) growth of 4-4.8%, up from the prior projection of 4%. The company anticipates adjusted operating income (including 53rd week) growth rate in the 7-9.5% range, up from the earlier guided range of 4-9%. For fourth-quarter fiscal 2018, management anticipates Enterprise revenues between $14.2 billion and $14.5 billion, and a comparable sales increase of 1-3%. Management also projects adjusted earnings in the band of $1.89-$1.99 a share. The company also expects domestic comparable sales to rise in the range of 1-3% in the fourth quarter, while international comparable sales are estimated in the band of flat to up 3%.

Hurdles to Cross

Best Buy is planning to spend approximately $750 million to $800 million in fiscal 2018, up from the previous estimate of $700 million as the company wants to increase the investment to boost e-commerce operations and supply chains to counter competition. Analyst believes increase in investment may strain margins in the coming quarters. We also noted that SG&A expenses have increased 2.2% and 3.2% in the third and second quarters of fiscal 2018, respectively. Higher expenses may also weigh upon margins.

We also believe that challenging retail landscape, aggressive promotional strategies and waning store traffic might hurt Best Buy's performance.

3 Other Retail Stocks Hogging the Limelight

G-III Apparel Group, Ltd. GIII delivered an average positive earnings surprise of 6.1% in the trailing four quarters. It has a long-term earnings growth rate of 15% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ross Stores, Inc. ROST delivered an average positive earnings surprise of 5.5% in the trailing four quarters. It has a long-term earnings growth rate of 10% and carries a Zacks Rank #2 (Buy).

Wal-Mart Stores, Inc. WMT delivered an average positive earnings surprise of 2.2% in the trailing four quarters. It has a long-term earnings growth rate of 6.1% and carries a Zacks Rank #2.

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