Scott Olson
Elevator Pitch
My investment rating for Best Buy Co., Inc.’s (NYSE:BBY) stock is a Hold.
I previously did a review of Best Buy’s Q3 FY 2022 (YE January 31) earnings in my prior November 24, 2021 initiation article for BBY. I turn my attention to Best Buy’s upcoming Q2 FY 2023 earnings in this latest article for the company.
I reduce my rating for BBY from a Buy to a Hold. The key items to watch and analyze for Best Buy include its recent business updates, the sell-side’s consensus financial projections, and its stock price performance. My analysis leads me to the conclusion that Best Buy’s future financial results for the near term and intermediate term are expected to be rather poor, but this has been priced in to a large degree. This makes Best Buy a Hold, rather than an outright Sell.
Q3 FY 2022 Earnings Release Date For BBY
In a media release issued on July 27, 2022, Best Buy revealed that the company will report its financial results for the second quarter of fiscal 2023 on Tuesday, August 30, 2022, before trading hours.
Spotlight On Best Buy’s Business Updates And Consensus Forecasts
Prior to the company’s August 30 earnings announcement, BBY’s business updates relating to its Q2 FY 2023 performance and the Wall Street analysts’ consensus financial projections for its upcoming quarterly results have caught the market’s attention.
In Best Buy’s July 27, 2022 press release (which was referred to in the preceding section), the company disclosed expectations of reversing from a positive comparable sales growth of +19.6% for Q2 FY 2022 to delivering a 13.0% decrease in comparable sales in Q2 FY 2023.
BBY also guided in its late-July media release that the company’s Q2 FY 2023 top line should turn out to be “7.5% higher than pre-pandemic Q2 FY20.” Best Buy’s Q2 FY 2020 revenue was $9,536 million, so this translates into an estimated Q2 FY 2023 top line of $10,251 million for the company. This in turn implies that the management of Best Buy expects the company’s revenue to contract by -13% YoY and -4% QoQ for the second quarter of the current fiscal year.
Apart from expectations of lower comparable sales and revenue for Q2 FY 2023, BBY is guiding for weaker profitability in the quarter. Specifically, Best Buy sees its non-GAAP adjusted operating profit margin decreasing from 6.9% in Q2 FY 2022 and 4.6% in Q1 FY 2023 to 3.7% for Q2 FY 2023.
Before the company issued its July 27, 2022 business update announcement, the sell-side analysts had earlier anticipated that Best Buy will achieve a higher revenue of $10.83 billion for Q2 FY 2023. The current market consensus Q2 FY 2023 top line for BBY is much lower at $10,241 million as per S&P Capital IQ data, and this is largely in line with Best Buy’s latest $10,251 million revenue guidance.
Sell-side analysts have also projected Best Buy’s Q2 FY 2023 non-GAAP operating margin to be 4.7%, which is the same as the company management’s expectations as highlighted in its July 27, 2022 press release.
An August 12, 2022 Seeking Alpha News article cited a report from the Wall Street Journal mentioning that “BBY cut ‘hundreds of jobs’ across the country in the past week” in response to challenging economic conditions and weak consumer sentiment. This helps to explain why both company management and Wall Street analysts are bearish on Best Buy’s performance and prospects in the very near term.
My Bet Is On BBY Reporting In-Line Earnings
The sell-side’s consensus normalized Q2 FY 2023 earnings per share or EPS estimate for Best Buy is $1.29, based on financial data sourced from S&P Capital IQ.
I am betting on BBY’s actual EPS for the second quarter of fiscal 2023 to be roughly in line with market expectations for two reasons.
The first reason is that Best Buy’s current consensus Q2 FY 2023 bottom line forecast has already factored in a substantial drop. BBY’s non-GAAP EPS projection of $1.29 for Q2 FY 2023 is equivalent to a -57% YoY fall and a -18% QoQ decline. In addition, the sell-side’s consensus top line and operating margin forecasts are very similar to the company management’s expectations as per its most recent business updates as discussed in the previous section.
The second reason is that the market didn’t react negatively to Best Buy’s business updates with respect to its Q2 FY 2023 financial performance as outlined in its July 27, 2022 announcement. BBY’s shares rose by +4.7% from $74.49 as of July 27, 2022 to $77.99 as of July 28, 2022, and its last traded stock price was just slightly lower at $77.63 as of August 24, 2022. This suggests that investors expect Best Buy’s Q2 FY 2023 financial performance to be in line with the sell-side’s expectations. In contrast, if investors were predicting an earnings miss, Best Buy’s shares should have headed south in the last month.
All Eyes On 2025 Financial Targets
In early-March 2022, Best Buy outlined new financial targets for fiscal 2025. Based on the mid-point of its medium-term financial guidance, BBY is expected to deliver revenue and operating profit of $55 billion and $3.6 billion (equivalent to an operating margin of 6.5%), respectively for FY 2025.
There are worries that Best Buy might have to revise its FY 2025 financial targets downward, considering the fact that the company has just recently reduced its full-year fiscal 2023 guidance. Making reference to the July 27, 2022 press release again, BBY changed its FY 2023 comparable sales decline guidance from -4.5% (mid-point of guidance) to -11.0%, and it also lowered its current fiscal year’s operating margin expectation from 5.3% (mid-point of guidance) to 4.0%.
It is no surprise that the sell-side analysts don’t expect Best Buy to achieve a top line of $55 billion and an operating income of $3.6 billion by FY 2025 that it is targeting to achieve. Based on consensus numbers taken from S&P Capital IQ, the market’s current expectations are that BBY’s actual FY 2025 revenue and EBIT will be -13% and -35% lower relative to its FY 2025 goals at $47,952 million and $2,345 million, respectively.
I am also of the view that Best Buy will fall short of its FY 2025 financial targets as well. It will be difficult to drive sales growth in a tough economic environment, and negative operating leverage will be a drag on the company’s profitability. Also, I noted in the late-November 2021 initiation article that “BBY’s new Totaltech membership program is the key growth driver for the company in the intermediate-term.” It is very likely that renewal rates for the Totaltech membership will decline during this period of significant economic stress, and it will be challenging for Best Buy to attract new members too.
In a nutshell, BBY’s FY 2025 financial goals seem too ambitious in light of the current environment. The good news is that the expected downward revisions to its fiscal 2025 financial targets are reflected in the market’s consensus financial estimates and its 2022 stock price performance. Best Buy’s stock has fallen by 24.0% year-to-date, in contrast with a milder -13.7% correction for the S&P 500 over the same period.
Closing Thoughts
I am no longer as bullish on Best Buy as I was at the end of last year, and this explains why I have chosen to downgrade my investment rating for BBY’s shares from a Buy to a Hold. BBY should witness a top line contraction and lower margins for the upcoming Q2 FY 2023 results, and the company isn’t in a good position to realize its FY 2025 financial goals. But this shouldn’t be a surprise for the market, taking into account the current consensus forecasts for BBY, and the stock’s weak 2022 year-to-date share price performance. As such, Best Buy deserves a Hold rating, as the risk-reward for the stock is balanced with negatives priced in.
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