Best Buy Expects to Feel List 4B Tariff Impact in Q1; It's Bullish on Holiday-Quarter Sales

Q3 revenue was $9.76 billion vs. $9.59 billion in the year-ago quarter. Domestic comp sales grew 2 percent on strength in appliances, computing, headphones and services; gains offset declines in gaming and home theater, said the retailer. Domestic online revenue grew 15 percent year on year, primarily on higher order value, said Chief Financial Officer Matt Bilunas on a Tuesday earnings call.

Best Buy projects Q4 revenue of $14.75 billion-$15.15 billion, with Q4 comp sales growth of 0.5 percent-3 percent. Q4 guidance assumes announced Dec. 15 List 4B Section 301 tariffs will take hold, said Bilunas. To counter effects of tariffs, Bilunas said the retailer is bringing in products ahead of tariff implementation; making strategic decisions on vendor and SKU assortment; instituting promotional and pricing strategies and sourcing changes; and developing strategies with vendor partners. The most relevant tariffed categories for Best Buy for List 4A products are TVs, headphones and smartwatches; computers, mobile phones and game consoles for List 4B, Bilunas said.

CEO Corie Barry said tariff effects would be felt more acutely in Q1, given the timing of the 15 percent List 4B tariffs, due to hit near the end of the holiday quarter: “That tranche becomes more a conversation piece for next year.”

Barry cited the many "moving pieces" for tariffs, including competitive position, product assortment and supply chain manufacturing: “There really isn’t a precedent for where we are right now.” The retailer and its vendors are employing several strategies to counteract the tariff impact, including a “limited number of small price increases,” she said.

List 4A Section tariffs that took effect Sept. 15 included smaller screen size TVs, but with looming Dec. 15 duties, “you now have quite a few items that are on any of the lists, and elasticities for any given individual item are incredibly difficult,” Barry said. That’s compounded in the “highly promotional” holiday quarter when "it will be less about whether or not there’s a tariff on any individual item,” she said: “Q4 is all about price and promotional and how you’re positioning.”

Barry downplayed the six fewer shopping days between Thanksgiving and Christmas, saying Best Buy likes to define the holiday shopping season as Halloween-Christmas. Consumers are starting their shopping earlier "so they can finish earlier," she said, and they’re scoping out ads and deals earlier. Having fewer Thanksgiving-Christmas shopping days is “much less relevant” than it used to be, she said: “You’re going to capture that demand slightly differently.”

Fulfillment options available to consumers have “completely changed the competitive landscape” for how quickly shoppers can get their items, Barry said, noting Best Buy's expanding and free same-day, next-day and in-store pickup services. Best Buy offers consumers various options to buy, shop and have items delivered, including online, in-store and in-home with its Total Tech Support and Geek Squad services. Best Buy’s next-day service is available to 99 percent of U.S. ZIP codes, she said.

Best Buy's continuing to expand fulfillment options to meet varying consumer lifestyles, Barry said. In New York, it’s adding the ability for online customers to have products delivered same day within a three-hour delivery window, and last quarter it added 175 alternate pickup locations in UPS and CVS stores. For customers who prefer to pick up items, it’s rolling out curbside pickup; a Best Buy employee delivers an item directly to a customer’s car. In New York, Chicago and Los Angeles, online customers can order until 8 p.m. local and receive products the next day with free delivery, she said.

Responding to a question on possible Q4 revenue challenges, Bilunas noted Q4 is a “special season for consumer electronics.” Price and convenience are critical during the holidays when “a lot of other retailers use our category sometimes to drive traffic," he said. Though the company doesn’t see it currently, “there’s always the possibility of inventory constraints,” said the executive. The retailer expects softness in gaming to continue through the quarter.

Despite “some waning in consumer confidence,” Best Buy believes economic indicators are positive and consumer sentiment is strong, Bilunas said. Mobile phone, computing and home theater sales are expected to grow “a little more” in Q4, he said.

Wedbush Securities analyst Michael Pachter applauded Best Buy in a Tuesday investor note for an “admirable job mitigating the impact of tariffs,” but expects pricing pressure from tariffs to impact the holiday season. Pachter believes Best Buy can benefit from various upcoming tech innovations, with long-term targets “within the realm of possibility,” due to a higher mix of services and appliances. The analyst is “positive on this high-margin segment as Best Buy continues to take share,” he said.