Is Best Buy’s Stock Attractive At $107?

[Updated: 09/23/21] BBY Stock Update

Best Buy (NYSE: BBY) recently released its Q2 report, wherein revenues came in 2% ahead and adjusted earnings per share (EPS) were a whopping 57% above our estimates. The company’s revenues grew a strong 20% year-over-year (y-o-y) to $11.85 billion, driven by an enterprise comparable sales growth of 19.6% compared to an 18.4% consensus estimate. It should be noted that the company’s revenue was up 24% compared to the second quarter of its fiscal 2020 (which was in calendar 2019). Best Buy saw strong demand once again for technology products, particularly appliances, and services during Q2 FY 2022 (year ending Jan 2022) – despite facing pressure due to higher labor and supply chain expenses. The company’s operating income saw a 40% y-o-y jump to $797 million in Q2. That said, its operating margins were up to 7% of sales through the first half of the year – double the rate that the company was achieving before the pandemic struck in FY 2020. The robust demand and improving profit margins led to its earnings double in the fiscal first-half.

Customer traffic gains helped the management to issue a second straight upgrade to their annual outlook, despite mounting risks to the business related to inflation and the delta variant. Looking ahead, Best Buy expects its comparable sales to be in the range of flat to down 3% versus last year, compared to the previous annual outlook of a high single-digit decline for the second half of FY 2022 (year ending Jan 2022). The electronics retailer expects enterprise revenue to range between $11.4 billion to $11.6 billion in Q3 and to be around $51 to $52 billion in FY 2022. Also, Enterprise comparable sales growth is now expected to be 9% to 11% vs. a prior outlook of 3% to 6% growth for the full year. We have updated our model following the fiscal Q2 release. We now forecast Best Buy’s Revenues to be $51 billion for fiscal 2021, up 8% y-o-y, compared to a prior forecast of  $47 billion in revenues. We also expect adjusted EPS to come in at $9.43, up 19% y-o-y. compared to our prior estimate of $7.38. Given the changes to our revenues and earnings forecast, we have revised our Best Buy’s Valuation at $120 per share, based on $9.43 expected EPS and a 12.7x P/E multiple for fiscal 2022 – 12% higher than the current market price.

[Updated: 08/20/21] BBY Q2 Pre-Earnings

Best Buy (NYSE: BBY), a specialty retailer of consumer electronics, is scheduled to report its fiscal second-quarter results on Tuesday, August 24. We expect the retailer’s stock to likely trade higher post Q2 with both revenues and earnings beating expectations. Best Buy benefited from people transitioning to working from home during the pandemic with the growth in sales of products such as batteries, PCs, laptops, LCDs, printers, and refrigerators. Consequently, the retailer was able to drive consumers to purchase electronics online without losing customers to Amazon in FY 2021 (year ended Jan 2021). This trend continued into Q1 as well, where Best Buy’s comparable sales metrics jumped 37.2% rather than growing 17.1% for the quarter as the market had expected. The strong housing market-inspired consumers to invest in technology and appliances. We expect this trend to continue into Q2, as well. However, we anticipate customers to step up spending in other areas, such as travel and dining out, in the second half of the year.

Our forecast indicates that Best Buy’s valuation is $118 a share, which is 8% higher than the current market price. Look at our interactive dashboard analysis on Best Buy’s Pre-Earnings: What To Expect in Q2? for more details.

(1) Revenues expected to be marginally ahead of consensus estimates

Trefis estimates Best Buy’s Q2 2022 revenues to be around $11.6 Bil, slightly higher than the consensus estimate. In Q1, the retailer’s revenue of $11.6 billion topped the consensus by 11% and grew 37% year-over-year (y-o-y). While this selling period compared to a depressing prior-year period that included some of the most intense retailing lockdowns of the pandemic, the recent Q1 results also smashed results from the same period in 2019, which saw sales grow to $9.1 billion. The company said it had sales growth across almost all categories, with the largest gains in home theater, computing, and appliances. We expect this growth momentum into the second quarter, as well.

Looking ahead, we also believe that the servicing of electronics will grow, setting up Best Buy’s Geek Squad services for more business down the road. For the full year, Best Buy expects same-store sales to grow 3% to 6% this year. It had previously stated that they would range from a decline of 2% to a growth of 1%.

2) EPS likely to beat consensus estimates

Best Buy’s Q2 2022 earnings per share (EPS) are expected to be $1.90 per Trefis analysis, 3% higher than the consensus estimate of $1.85. In Q1, the company’s EPS of $2.23 delivered an approximate 60% surprise above analyst average forecasts of $1.39. The company saw a modest gross profit margin uptick y-o-y as it relied less on promotions in Q1. However, this gain was partially offset by rising costs in areas like fulfillment and labor.

For the full year, we expect Best Buy’s adjusted net margin to decline slightly from 4.4% in fiscal 2021 to 4.2% in fiscal 2022. This coupled with a 4% y-o-y decline (due to a strong comparison to the second half of FY 2021) in Best Buy’s revenues, could lead to a fall of $200 million y-o-y in adjusted net income to $1.9 billion in FY 2022.

(3) Stock price estimate higher than the current market price

Going by our Best Buy’s Valuation, with an EPS estimate of around $7.38 and P/E multiple of 16.0x in fiscal 2021, this translates into a price of around $118, which is 8% higher than the current market price of roughly $110.

For further comparison among peer groups, it is helpful to see how they stack up. BBY Stock Comparison With Peers shows how Best Buy compares against peers on metrics that matter.