'Premature' for Best Buy to Comment on Impact of List 4 Tariffs, Says Departing CEO

Though List 4, “as proposed,” contains “many consumer items, including many electronics,” it’s “unclear” whether the 25 percent tariffs on those products “will actually be implemented,” said Joly.

CTA estimates the eight Chinese import product categories proposed for tariffs on List 4 of biggest impact to the consumer tech industry were worth $138 billion in 2018 customs value, roughly 46 percent of the total $300 billion fourth tranche. List 4 would slap 25 percent tariffs on virtually all consumer goods Best Buy offers for sale.

Other List 4 unknowns are “what products will ultimately be included” and at what rate and on what effective date, said Joly. “One thing is, of course, certain,” he said. “The impact of tariffs at 25 percent will result in price increases and will be felt by U.S. consumers.” It was Joly's last call as Best Buy CEO before relinquishing the helm next month to Chief Financial Officer Corie Barry (see 1904150003).

The Trump administration has made no decision on the implementation of List 4, said Joly. “There’s a comprehensive process the administration will be going through to take input,” he said, including comments due June 17 and public hearings set to begin the same day. “We intend to be actively engaged in this process to help the administration continue to minimize the impact of tariffs on U.S. consumers.” There’s also “time” for the U.S.-China trade talks “to progress before any decision gets made” on List 4, he said.

Best Buy is standing pat on its February forecast for fiscal 2020, even though it was based on the assumption the List 3 tariffs would stay at 10 percent. The forecast now factors in the May 10 increase in List 3 to 25 percent (see 1905090018). The guidance is for total revenue to rise slightly from a year earlier to$42.9 billion-$43.9 billion on same-store sales increases between 0.5 percent and 2.5 percent.

The forecast “balances our better-than-expected Q1 earnings” with “our best estimate of the impact” from the List 3 hike to 25 percent, said Barry. Best Buy reported Q1 earnings per share of $1.02, significantly higher than the Wall Street consensus of 86 cents. Revenue of $9.14 billion for the quarter was in line with expectations. Q1 same-store sales increased 1.1 percent, compared with forecasts of flat to 1 percent same-store growth. The stock closed 4.9 percent lower Thursday at $65.82.

Joly repeated past assertions that Best Buy has minimal exposure to the List 3 tariffs because the products on the list are only 7 percent of the retailer’s annual cost of goods sold and are mostly accessories. Best Buy mitigated any impact rom List 3 by rushing in shipments to beat the May 10 increase and by renegotiating terms with vendors, he said. Barry in Q&A declined to estimate what Best Buy’s comparable exposure to List 4 might be if those tariffs were implemented as proposed.

With the 10 percent List 3 tariffs, the company broke down its mitigation strategies “into a few buckets,” said Barry. “In some cases, we obviously had some worldwide vendors” that were able to absorb the higher costs across their international operations, she said.

Best Buy also knew of vendors that would "absorb costs as a way to retain some of the business” with the retailer, said Barry. Still other vendors were “already moving supply chains around,” and finding “other ways to bring things in” without involving China, she said. “At 10 percent for that List 3, you have a much greater ability to influence using this variety of methods.”

As List 3 increased to 25 percent, “the discussion becomes quite different,” said Barry. "There’s a much lower likelihood you could absorb that as a vendor completely.” At 25 percent, “there will be higher prices for consumers,” she said.

It’s “tricky” figuring out “SKU by SKU, vendor by vendor, which of those tactics are going to work and which aren’t, and then how that will actually play into the back half” of the year, said Barry. “That's the work the team is doing, and definitely we did our very best to try to size it, but there’s still a lot of work to do there.”

Critical Signal Technologies (CST), the health services company that Best Buy bought this month to “help scale” its connected-health business, has about 100,000 elderly customers who subscribe through their Medicare Advantage plans, said Joly. Having CST in the Best Buy portfolio "allows us to engage with insurers,” and that will help grow the commercial business, he said. “We’re excited about the prospects of combining CST’s services and relationships” with GreatCall, the connected-health and personal emergency response services business that Best Buy bought last year (see 1808150071), said Joly.

Best Buy in fiscal Q1 launched its lease-to-own offering with Progressive Leasing through 70 percent of its stores across 36 states, said Joly. The rollout will expand to nine more states later in the year, he said. The program “in many cases” will allow Best Buy “to catch customers early on in their credit history and build a relationship with them over time,” he said.

Customers who “engage” with the Progressive Leasing offering “seem to be incremental to Best Buy,” said Barry. They’re customers Best Buy hasn't seen before, or hasn't "certainly seen in a while,” she said. “We like what we’re seeing. We feel like we really are addressing a customer need.”

Roughly a quarter of Best Buy's business is done through its own "branded credit card," said Barry. Customers who go the lease-to-own route don't qualify for the card "or frankly might not want to," she said. Lease-to-own gives them a new "suite of purchase options, and we’ll continue to see how it grows over time,” she said. She hopes the rollout through stores across the nine additional states can happen in time for the holiday selling season, she said.