Best Buy shares drop after missing Q2 expectations and incoming tariffs

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After missing analysts’ expectations of its second-quarter revenue and same-sales growth and the looming tariffs, Best Buy’s shares dropped to 8%, closing at $63.49 last Thursday.

The 8% share drop comes after the electronics chain decreased the top end of its revenue forecast for the year. The is said to be due to the unknown buying behavior of its consumers towards the ongoing US-China trade war and the decreasing gaming console sales.

On Thursday, Best Buy posted its second-quarter adjusted earnings of $1.08 a share. The company had to cut costs to improve its profitability. This adjusted earning has beaten analysts’ expectations by 9 cents.

For its quarterly profit, Best Buy saw a 2.5% dip to $238 million. This is because of a $48 million restructuring charge in Q2 that involved changing the store operating model.

In Q2, Best Buy saw its revenue rise from 1.7% to $9.54 billion. The number is below what analysts projected. In the quarter, sales of tablets, headphones, and appliances. The sales growth of the products made up for the sales decrease of products under the home theater equipment and gaming categories.

Best Buy has shrunk its revenue forecast for 2019. However, it has raised its profit outlook because it did better than anticipated in the first half of the year.

After reporting about the company and its better than expected profits but less than expected sales in Q2 2019, Best Buy CEO Corie Barry had this to say to investors: “It is hard to predict how, at the macro level, consumers will react to higher prices resulting from tariffs.”

“As you would imagine, the overall general volatility in the markets adds to our level of caution in our outlook,” adds Barry.

Barry is also pleased that the President Trump’s administration has delayed the implementation of tariffs on some items including mobile phones, computers, and gaming consoles until December 15. However, tariffs on other products such as smartwatches, headphones, TVs, and other items will start in September.

As a result of the escalating trade tension between two of the biggest economies in the world – the United States and China, both countries have announced that they would be imposing tariffs on each other.

Starting September 1, the U.S. will be imposing a 15% tariff on $112 billion in Chinese imports. By December, another batch of tariffs will take effect.

Barry has mentioned that it has not been determined yet whether consumers will be seeing higher prices on these products during this year’s holiday season. Best Buy has purchase agreements with several vendors. It has already brought in products into the country before the tariff starts.

In its attempt to reduce the impact of the tariffs, Best Buy has been looking at changing some of its vendors. It is also considering changing its product selection, creating promotions and working on pricing.

Best Buy’s vendor partners have also been looking at moving their operations away from China. These vendors are considering other countries like South Korea, Mexico, Taiwan, and Vietnam.

“I think everyone agrees there was a lot of reliance on China, especially in consumer electronics. And so we’re seeing that shift start as soon as today,” said Barry.

With the upcoming tariff impositions, about 60% of Best Buys products are set to be affected by the tariffs. Corie Barry said she is expecting the number to drop to about 40% next year. This could be due to the migration of manufacturers from China to other territories. Barry also mentioned that the actual effect would be more minimal as Best Buy has mitigation plans in place and the exemptions of some of its partner vendors and their products.

In a statement, Moody analyst Charlie O’Shea said: “Despite uncertainty surrounding potential tariffs, Best Buy’s raising of guidance indicates that it believes it can weather whatever tariff situation results with minimal upset.”

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