Best Buy Shares Plunge After Full-Year Guidance Trimmed on Likely Tariff Fallout

In May, Best Buy held to its February FY 2020 revenue guidance of $42.9 billion-$43.9 billion on enterprise same-store sales increases between 0.5 percent and 2.5 percent (see 1905230019). Thursday, it shaved the top end of the guidance range to $43.1 billion- $43.6 billion, and cut its same-store sales growth forecast to 0.7 percent-1.7 percent.

This reflects Best Buy’s “best estimate of the impact from the List 4 tariffs and the most recent announcement regarding List 3 moving to a 30 percent rate” from 25 percent (see 1908270067), said Corie Barry on her first call as CEO. The guidance factors in steps Best Buy is taking to mitigate the impact of duties, she said. Measures including bringing in products ahead of the tariffs' implementations, decisions on vendor and SKU assortments, promotional and pricing strategies and sourcing changes, she said.

Chief Financial Officer Matt Bilunas said the revision reflects “the strong earnings performance in the first half of the year as well as our best estimate of the tariff impacts and consumer buying behaviors in this very fluid environment.”

On how uncertainty will relate to customer buying behavior over the next two quarters, Barry said, “it is hard to predict how, at the macro level, consumers will react to higher prices resulting from tariffs.” The “overall volatility in the financial markets adds a level of caution to our outlook.” She called tariffs a “rapidly evolving situation,” and credited Best Buy's sourcing teams for adapting daily.

Best Buy was a “very active participant” in the comments period for the List 4 tariffs and was pleased about the Trump administration’s decision to delay the effective date of “many of the products” on the list until Dec. 15, Barry said. The delay will “mitigate some of the impact of higher prices for American consumers during the holiday season,” she said. Products that will be most affected by Sunday’s tariff increase are TVs, smartwatches and headphones; the most notable categories feeling the pain of Dec. 15 duties are laptops and tablets, mobile phones and game consoles, she said.

The headphone category was listed as one of the growth drivers of Q2 revenue on the earnings release, along with tablets, appliances and services. Gaming and home theater segments declined.

In response to tariffs, many vendors are in the process of migrating manufacturing out of China, said Barry, and its merchants are responding with “a view to minimize costs and risks.” She warned of “some short-term volatility,” but said the retailer expects to adapt to the “new environment.” The company is “supportive of free and fair trade” between the U.S. and China, she said.

On how tariffs will play out in pricing at retail, Barry said in Q&A “there’s “a bit of art and a bit of science to estimating this, and we don’t exactly have a precedent for the quantity of moving pieces in place right now.” Factors include the continuing product changes on the tariff list, “when they’re implemented, and at what rates,” she said. She referenced public comments about some vendors potentially being exempted from tariffs through the List 3 and List 4 exclusion processes.

Vendors’ continuing migration out of China will result in a lower impact from tariffs next year, Barry predicted, “because you’re seeing supply chains already start to move.” Best Buy’s business has been affected “substantially less than the overarching quantity” of products affected by duties, she said. About 60 percent of Best Buy's total costs of goods are produced in China, "but there's a massively smaller portion of that that's actually being affected by tariffs," Barry said, "because of some of the negotiating power" and mitigation strategies the retailer has put in place.

On how tariffs will affect holiday pricing, Chief Operating Officer Mike Mohan said Best Buy has existing purchase orders, forecasts, commitments and contracts with vendors “around what we pay for items and how we bring them into the country,” and it’s too soon to predict how that might change as a result of tariffs. He said some product is “already on the water,” some is in the U.S., some products may not see price increases and some may evolve to different models “before there’s any really significant price impact.” Other factors are whether product is sourced from another factory outside of China or whether a product “morphs to a different feature set that would warrant a price increase.”

On Q4, Barry said, "It's always a promotional period" and the retailer expects the deals "to start earlier and last longer." For 2019, "I don't see anything that's wickedly out of the ordinary, she said, "or anything in front of us that looks completely different."

The tariff and supply chain situation continues to be “very fluid,” said Mohan, but “the significance that Best Buy plays in the overall consumer electronics market worldwide does give us more leverage” than the company can explain on an earnings call. The retailer is working with every partner on where they source “to mitigate any impact to consumers on pricing and to us.”

Tariffs “have the potential to derail” Best Buy’s long-term growth plan, wrote Wedbush Securities analyst Michael Pachter in a Thursday investor note. The analyst praised Best Buy for achieving difficult financial targets “year after year,” but while he thinks growth can continue from the higher mix of services and appliances, he expects “pressure from looming tariffs to persist."

While it's the TVs sourced from China that have List 4A tariff exposure, the "bulk of Best Buy business" is in large-screen TVs assembled in Mexico, said Mohan. Those are primarily 55-inch and larger TV sets, and "we feel very good" about that segment of the category, he said. That includes where they're positioned, their inventory levels and prices, "and the promotions we build to run on those," he said.

On products sourced from China, “with advanced lead time, I also feel good about what we have currently in inventory," said Mohan. "We’ll look at our assortment as we move forward based on where the demand signals are," and if there are "any pricing implications to them," he said. Best Buy's own Insignia brand of TVs are mostly sourced from China.

With Best Buy’s inventory of 55-inch-and-larger TVs shipped from Mexico, the retailer can mitigate the impact of tariffs "by upselling to larger screens this holiday," said Pachter.

Responding to a question on what guidance would be if tariffs weren't an issue, Barry said that would be “nearly impossible” to answer because tariffs don’t just affect individual SKUs but also relate to consumer and macro conditions. With tariffs “part of the conversation” for the past 18 months, their “constant morphing” makes it “almost impossible” to strip out impact of List 4 tariffs on full-year guidance.

Q3 revenue is expected at $9.65 billion-$9.75 billion on comparable sales growth of 0.5-1.5 percent, said Bilunas. The company doesn’t expect tariffs to have much of an impact on Q3 performance “at this time,” he said.

Computing and mobile phones were 44 percent of Q2 revenue, down a percentage point from Q1; consumer electronics were up 1 percent at 32 percent of mix, followed by appliances at 13 percent, entertainment at 5 percent, and services at 6 percent. Entertainment fell 13.7 percent in mix; services grew 10.7 percent, it said. International comp sales were off 1.9 percent, reflecting negative foreign currency exchange rates in Canada, it said.

All Best Buy stores are certified as Apple Authorized Service Providers, making them the "largest physical destination" for authorized Apple repairs, including same-day service, said Barry. Nearly 10,000 Best Buy Geek Squad agents have completed the Apple training, Barry said, and stores are equipped with Apple tools and parts. Consumers can schedule Best Buy repairs at Bestbuy.com and Apple.com. More than 200 Best Buy locations have been certified Apple repair centers since 2017, she said. The relationship “drives traffic,” said the executive: almost 40 percent of Apple repair customers are either new to the retailer or “re-engaged” Best Buy customers, she said.