In February, I placed a “Sell” rating on Best Buy (NYSE:BBY), saying its Q4 guidance looked aggressive. Its Q4 results were better than I expected, but weak guidance sent the shares lower, and I moved my rating up to “Hold” given a lack of downside catalysts and BBY’s strong capital allocation policies. The stock is down -4% since I moved it to “Hold” and has generated a -15% return since my original write-up. Let’s catch up on the name.
Q2 Results And Upcoming Holiday Season
When I moved my rating up to “Hold,” I thought the company was likely trying to be conservative with guidance. However, the company did reduce its sales outlook when it reported its Q2 results.
For Q2, BBY saw revenue decline -7.3% to $9.58 billion. Compared to analyst estimates, revenue was basically in line, topping the consensus by $60 million.
Overall comparable-store sales fell -6.2%. Same store sales were towards the high end of the -6% to -8% decline the company predicted on its Q1 earnings call. When the company reported its Q1 results, SSS were within its guidance range.
Domestic revenue dropped -7.2% to $9.6 billion on a -6.3% decline in same-store sales. Domestic online revenue fell -7.1%.
International sales declined -8.8% to $693 million, with comparable-store sales down -5.4%. Currency negative impacted sales by -340 basis points.
Gross margin came in at 23.2%, up 110bps versus a year ago.
Adjusted EPS came in at $1.22, a -20.8% decline from $1.54 a year ago. That topped analyst estimates by 15 cents.
Turning to the balance sheet, inventory was down -6.5% to $5.65 billion. The company ended the quarter with debt of $1.16 billion and cash and equivalents of $1.09 billion. The company also had operating leases of $2.9 billion.
Looking ahead, BBY reduced its sales forecast, while narrowing its EPS outlook. It now expects to generate revenue of between $43.8-$44.5 billion, down from prior guidance of $43.8-$45.2 billion. It now expects same store sales to be down between -4.5% to -6.0% versus a previous outlook for comparable store sale to decline between -3.0% to -6.0%.
The retailer is now projecting adjusted EPS to come in between $6.00-6.40. This compares to prior guidance calling for adjusted EPOS of between $5.70-$6.50.
For Q3, the company expects its same-store sales to be slightly better than the -6.2% it posted for Q2. For the first 4 weeks of August, its SSS were down about -6%. For Q4, the company is looking for same store sales to decline -3% to be slightly positive.
Discussing its outlook on its Q2 earnings call CEO Corie Barry said:
“There are a number of factors supporting our belief that our Q4 year-over-year comparable sales will improve and could potentially turn positive. We expect growth in home theater as we expect to be better positioned with inventory across all price points and budget spend last year. We are starting to see signs of stabilization in our home theater business. For example, TV sales trends improved in Q2 and units returned to growth. We expect performance in our computing category to improve as we build on our position of strength in the premium assortment. While not exactly linear, we are also starting to see signs of stabilization in this category as Q2 laptop sales trends improved materially and units were flat to last year. We expect to see continued growth in the gaming category as inventory is more readily available and there is a promising slate of new software titles expected to be released in the back half of the year. We are planning for potential growth in the mobile phone category as we expect inventory to be less constrained than last year and expect to drive growth in our unlocked phones business. Our hypothesis regarding the holiday season is that the consumer largely returns to pre-pandemic behavior. By this, we mean that they will be looking for great deals and convenience and traffic will be weighted toward promotional events. We have an excellent team and strong omnichannel assets that thrive in such an environment. In summary, while the macro and industry backdrop continue to drive volatility as we move through the year, we have a proven track record of navigating well through dynamic and challenging environments, and we will continue to adjust as the macro conditions evolve. And we remain incredibly excited about our future opportunities. “
Overall, BBY continues to put up pretty lackluster results, as same-store sales continue to decline. However, it has done a good job lowering inventory and keeping gross margins strong. The company still generates a lot of cash flow, which is funnels into a nice stock dividend.
Like many retailers, the holiday season is the most important for BBY, and on that front the company looks like it is poised to be very aggressive on the promotional front. The company is starting holiday promotions this month, getting a very early jump. Meanwhile, Mastercard (MA) is projecting a 6% increase in electronics spending this holiday season, which should bode well for the company.
This comes despite continued macro uncertainty with higher interest rates, the return of student debt payments, and continued high prices due to inflationary pressures. Counteracting that is that unemployment remains low and wages have also risen.
Valuation
BBY currently trades around 6.6x the 2023 consensus EBITDA of $2.73 billion and nearly 6.5x the 2024 consensus of $2.80 billion.
From an EBITDAR perceptive, it trades at about 5.1x 2023 EBITDAR and 5.0x 2024 EBITDAR.
On a PE basis, it trades at 11.3x the 2023 consensus of $6.24 and 10.5x the 2024 consensus of $6.74.
The company is projected to see revenue fall -4.5% in 2023 to $44.2 billion, and -0.4% in 2024 to $44.0 billion.
While there are no great comps for BBY, I view a 5x EBITDAR multiple as very cheap given the strength of the company’s balance sheet. While revenue is declining, it’s not rapidly declining and it looks like things should begin to improve.
Conclusion
While I think there remain some longer-term secular headwinds facing BBY, with the 2023 holiday season looking like it may be shaping up well for electronics and with the stock’s valuation very inexpensive, BBY stockholders could be in a good spot in the near-to-medium term. I originally thought BBY was cautious with its FY2024 guidance, and with the company lowering its revenue projections even more, it could be setting itself for a nice top-line and bottom line beat in Q4. Its inventory is now in really good shape versus a year ago, and projections are for electronics to be one of the hottest retail categories this holiday season – that’s a good combination.
BBY currently pays a $3.68 dividend, good for an over 5% yield. The dividend is well covered by BBY’s over $1 billion in yearly operating cash flow, so I see it has safe. Taken all together, I’m going to raise my rating on BBY from “Hold” to “Buy.”
The biggest risks to the stock are if the holiday season for electronics doesn’t take shape as expected. The macroenvironment remains cloudy and there are still consumer headwinds out there, so there is no guarantee consumers will be opening up their wallets this holiday season.
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