What Investors Need to Know About Best Buy’s Huge Boost in Earnings

Stock prices spiked thanks to "Fortnite" success.
  • Best Buy delivered more than double the profits over the same quarter last year.
  • The big quarter was unexpected partly because the retailer failed to fully appreciate the popularity of video game “Fortnite.”
  • BBY stock jumped by 14.11 percent for the day, continuing a major comeback from when it appeared to be on the edge of bankruptcy in 2012.

Best Buy (BBY) appears to be in the process of making its naysayers look like a bunch of noobs. The brick-and-mortar retailer’s stock spiked on Feb. 27 to the tune of a 14.11 percent gain to $68.82 a share. Driving the gains was a fourth quarter earnings report that showed major gains in profits and improving same-store sales, not to mention an unexpected bump in sales of gaming consoles and associated equipment that the company’s chief financial officer attributed to the runaway popularity of the game “Fortnite.”

Learn: How to Use Quarterly Earnings Reports to Your Advantage

Best Buy’s Doing Fine Despite Amazon Competition

The results for the three months ending on Feb. 2, 2019, would appear to demonstrate that Best Buy has figured something out about in-store retail that is keeping it afloat and even thriving in the era of e-commerce.

Although revenue did slip from the same period last year — by about half a billion — this most recent quarter was a week shorter than the one last year. However, despite that shorter time frame and lower revenue, net earnings more than doubled year-over-year from $364 million to $735 million. Perhaps most importantly, the company reported a 4.8 percent jump in same-store sales for the full year. Same-store sales is a metric that compares sales in the same location to previous years to isolate growth from improving business as opposed to new stores, and it’s often viewed as one of the most important indicators of health for a retail business.

Finally, guidance for the coming fiscal year — official projections from the company — put its full-year earnings per share at $5.45 to $5.65. That would mean that analyst estimates of $5.49 would fall in the lower range and would seem to indicate the company’s internal projections are more positive than expected.

See: Companies That Are Thriving During the Retail Apocalypse

‘Fortnite’ a Major Driver of Best Buy’s Q4 Sales

One specific reason why Best Buy might have outdone expectations came down to a specific cultural phenomenon: “Fortnite.” The company’s chief financial officer — Corie Barry — cited the game’s wild popularity as a major driver of sales and a big reason why the quarter was so much better than many were expecting. While “Fortnite” is an online video game, Best Buy stores carry the accessories that fans want.

The CFO related on a call to analysts that the game’s popularity appeared to catch the company by surprise, giving it a nice holiday gift that it hadn’t necessarily expected to see under the tree. That said, CEO Hubert Joly also cautioned reporters against taking too much from short-term trends in entertainment, pointing out that it’s difficult to anticipate how long trends in entertainment might last.

Related: Madden NFL, Fortnite and Other Esports Tournament Prizes Over $1M

Best Buy Succeeding Where Others Have Failed, Does That Make It a Buy?

Some investors might be surprised by Best Buy impressing at a time when brick-and-mortar retailers like Sears are going into bankruptcy. However, the chain’s success would appear to point toward the potential for retailers to develop novel strategies to adjust to a new era. In 2012, the company saw profits shrink by 90 percent in a single quarter, and it ousted its then-CEO to hire current chief Joly. Things have turned around since then on the back of Joly’s five-point “Renew Blue” campaign, and the stock today is worth more than six times where it was at the end of 2012.

That makes for an interesting case as to whether or not Best Buy represents a good buy at its current price. The company also announced that it was boosting its dividend by 11 percent to $2 a share, putting the yield at about 2.9 percent based on its current price. That’s the sixth time in six years that the company has increased its quarterly dividend payout, and it also offered a special cash dividend in 2015 and 2016. Pair that with the announcement of a new $3 billion share buyback program and Best Buy appears to be unflinching in its commitment to returning profits to the shareholders. What’s more, with a PE ratio under 20 and a PS ratio of just 0.43, the stock would appear to be a solid pick for the discerning value investor.

Granted, the very serious headwinds facing any brick-and-mortar retailer shouldn’t be overlooked, and Best Buy’s recent successes can’t be guaranteed moving forward. Not to mention, the company’s relatively small profit margin — just 2.52 percent — might mean it doesn’t have a ton of room to maneuver if sales start to lag or a recession hits. However, with a solid dividend that keeps rising and a share price that’s still low when weighed against top-line revenue, some might argue that “Best Buy” could describe the stock as well as the store.

Check out retail companies that are actually expanding during the retail apocalypse.

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