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Nov 20, 2018

Best Buy boosts forecast but big spending has investors on edge

Target stumbles; Best Buy boosts forecast

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Best Buy Co. investors weren’t satisfied even after the company posted strong sales growth and boosted its full-year forecast heading into the critical holiday period. Shares were little changed in early trading.

Comparable-store sales in the U.S. -- the retailer’s most-watched metric -- rose 4.3 percent, beating analysts’ expectations. That’s a slowdown though from recent quarters, signaling that the company’s path gets steeper from here as it’s now facing tough comparisons with its strong performances from the same period a year ago.

Key Insights

-Margins contracted in the quarter. Investors have honed in on Best Buy’s gross margins as the company is investing heavily to build out new offerings like beefed-up tech support and an army of traveling sales advisers who make house calls. And like all retailers, Best Buy is grappling with higher transportation costs.

-The consumer-electronics category has gotten healthier in recent months, and that’s good news for Best Buy, as it’s the last remaining national chain that specializes in TVs, computers and smart-home gadgets. It’s biggest gains in the third quarter came from mobile phones, video games and appliances.

-As Best Buy gears up for the core holiday season, which typically accounts for more than one-third of its annual sales, it should benefit from the bankruptcy of Sears Holdings Corp., a major seller of appliances. Additional sales of fridges and ovens could add 2.5 percentage points to Best Buy’s comparable-store sales, UBS has estimated. Best Buy is even adding more toys to its assortment in the wake of Toys “R” Us’s demise.

Market Reaction

-Best Buy’s Minneapolis neighbor Target Corp. (TGT.N) also reported quarterly sales Tuesday, and Wall Street wanted more. Target generates 40 per cent of its annual electronics sales this month and next.