Best Buy’s 1Q16 Gross Margin Improves, Operating Margin Dips

Best Buy Manages to Get Better in 1Q16

(Continued from Prior Part)

Gross margin improves

Best Buy’s (BBY) margin in the first quarter of fiscal 2016 ending May 2, 2015, improved to 23.7% from 22.8% on a year-over-year basis. Gross margin improved due to several factors:

• the company’s credit card portfolio

• a shift in the product mix to higher-margin computing hardware

• a smaller proportion of its revenue from the lower-margin tablet category

• a favorable impact of the changes in the company’s mobile warranty plans.

Factors that adversely affected Best Buy’s gross margin include higher inventory reserves on its non-iconic phone inventory and the impact of certain lower-margin iconic phones.

The gross margin of the company’s international segment declined by 100 basis points due to the impact of the brand consolidation in Canada and higher promotional activity in Canada.

Operating margin declines

Best Buy’s 1Q16 operating margin declined to 1.0% from 2.4% in the comparable quarter of the previous year, due to increased investments associated with growth initiatives and higher incentive compensation. Higher expenses offset the impact of benefits from the company’s Renew Blue productivity initiatives and a benefit from an operating tax settlement.

Best Buy’s online rival Amazon (AMZN) reported an operating margin of 1.1% in the comparable first quarter, compared with 0.7% in the first quarter of the previous year. Best Buy’s smaller peer Aaron’s (AAN) generated an operating margin of 10.3% in 1Q16, down 30 basis points from 1Q15.

Cost reduction initiatives

Best Buy commenced the second phase of its Renew Blue cost reduction and gross profit optimization program. The program aims to generate ~$400 million of savings over the next three years. These benefits are expected to emerge only in the second half of fiscal 2016. However, these benefits will be offset by investments in future growth initiatives. Through fiscal 2015, Best Buy achieved $1.02 billion in cost reductions under its Renew Blue program, which the company initiated in fall 2015.

Best Buy makes up ~0.1% and 0.4% of the iShares Core S&P 500 ETF (IVV) and the Consumer Discretionary Select Sector SPDR Fund (XLY), respectively.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Best Buy’s 1Q16 Revenue Declines, But Still Exceeds Estimates

• Part 2 - Best Buy’s Domestic Segment Beats Its International Segment

• Part 4 - Smartphones and TVs Drive Best Buy’s 1Q16 Same-Store Sales