China and Mexico are the company’s two largest sources of goods.
Best Buy (NYSE:BBY) stock was plummeting on Tuesday, dropping some 13% after the consumer electronics retailer posted fourth quarter earnings results.
The earnings themselves were strong, easily beating estimates as the company continues its turnaround.
But investors were more focused on the cloudy outlook, which should include some challenges due to the tariffs imposed on its biggest trade partners. China and Mexico are the two largest sources of the products it sells, and both countries got slapped with major tariffs this week by the Trump Administration.
Mexico and Canada got hit with 25% tariffs on imports to the United States. China saw its tariffs increased from 10% to 20% on many products, including computers, cell phones, appliances, and electronics – all things that Best Buy sells.
“China and Mexico remain the number one and number two sources for products we sell, respectively,” CEO Corie Sue Barry said on the Q4 earnings call, via Investing.com. “While Best Buy only directly imports 2% to 3% of our overall assortment, we expect our vendors across our entire assortment will pass along some level of tariff costs to retailers, making price increases for American consumers highly likely.”
About 55% of Best Buy’s products are sourced from China, according to Yahoo Finance, while about 20% are sourced from Mexico.
The impact of tariffs on earnings
Best Buy offered guidance for this fiscal year, but it did not include the impact of tariffs, given the uncertainty over how long they will last.
For the full fiscal year, Best Buy expects revenue of $41.4 billion to $42.2 billion, which would be up at the midpoint from $41.5 billion in the previous fiscal year. Comparable store sales are projected to be flat to up 2%. Adjusted diluted earnings are targeted to come between $6.20 to $6.60 per share, which would be up slightly at the midpoint, from $6.37 per share last fiscal year.
But the tariffs, if they remain in effect, will likely be a drag on earnings. Barry said that if the 10% China tariffs that went into effect February 4 lasted the whole year, it would hurt comparable store sales by 1 point, with the impacts affecting quarters 2 through 4.
That could potentially be a $0.20 EPS headwind, according to analysts.
That’s based on the assumption that the vendors are going to pass on a material portion of the higher costs of tariffs to Best Buy.
“Of course, you know, we prefer not to raise prices. But because of the higher COGS (cost of goods sold), we need to enact some price increases, and that is going to vary based on product category, SKUs, competitive environment, and other factors,” CFO Matthew Bilunas said on the earnings call.
How will consumer react?
The “giant wild card,” said Bilunas, is how consumers are going to react to the price increases if they sustain throughout the year.
Barry added that it is a volatile environment for the consumer, reflected in the recent lower consumer confidence numbers.
“So, we’re watching that and trying to understand how best do we meet consumer needs in that environment,” the CEO said.
This week, tariffs on China were doubled to 20% on certain items, but Best Buy officials would not necessarily say that the negative impact on earnings would double.
“It’s not going to be a linear point of view on how this impacts, particularly, at the end of the day, the consumer who, of course, given how the tariffs are structured right now will have impacts across many of the things that they are purchasing,” Barry said. “So, I think we try to give you our best take based on what we can see today, but to just point out that the difficulties in trying to assess the situation given how unique it is.”
How big will price increases be?
On the earnings call, analysts asked how much the price hikes might be, and when they could take effect.
Barry said it was too difficult to speculate on the size of price increases because it is unknown how much vendors will pass on or absorb, and what the competitive landscape will be like, as tariffs will impact the entire industry.
“This is a full value chain that starts with the manufacturing and then works its way all the way through,” Barry said. “So this starts much further upstream with our vendor partners who are navigating this environment along with us.”
And the price increases would likely come in quarters 2 – 4, as the store carries some six weeks of supply. So it wouldn’t be an immediate impact, if the tariffs remain in place.
Best Buy got a slew of price target reductions after earnings, due mainly to the tariff impacts. Roughly 10 Wall Street analysts lowered their price targets, with Guggenheim and Morgan Stanley each dropping it by $15. Guggenheim lowered it to $90 per share, while Morgan Stanley dropped it to $85 per share.
That would be a 13% to 20% increase over its current $75 per share price.
