Best Buy Earnings: Retailer Taking Appropriate Steps to Prop Up Results, but Soft Guidance Stings

Narrow-moat Best Buy’s BBY guidance suggests another year of sales declines, setting the stage for a more protracted route to recovery than we’d initially contemplated. While we believe that the firm’s strategic priorities—investing behind its omnichannel, building customer relationships through its TotalTech loyalty program, and incubating its nascent Best Buy health business—are cogent, we expect to lower our $105 fair value estimate by a high-single-digit percentage on softer fiscal 2024 sales and the operating deleverage that follows. Shares continue to trade at about a 15% discount to our revised intrinsic valuation.

The firm reported better-than-expected fourth-quarter results, with a 9.6% same-store sales decline and diluted EPS of $2.23 edging our 10% decline and $2.16 EPS forecasts, respectively. The bulk of our trepidation is tied to a sales growth forecast that implies a 5.5% decline at the midpoint relative to our prior $47.1 billion estimate for the year to come, blunting any potential margin recapture and resulting in diluted EPS guidance 14% below fiscal 2023′s $7.08 per share estimate. Results are reflective of a difficult macroeconomic environment (offline electronics and appliance retailers saw a 14% annual contraction in sales during the fourth quarter, per our calculations and Census Bureau data), which figures to persist at least until the back half of the calendar year.

On a positive note, the firm’s TotalTech loyalty program saw its member base grow 26% from a year ago (to 5.8 million members) and represents a key piece in the firm’s gross margin recapture narrative. As we parse the moving pieces in the firm’s profitability puzzle, we expect the combination of general and administrative leverage, TotalTech maturity, and incremental benefits from Best Buy Health to render 5% GAAP margins attainable in the long term, though maintaining durable square footage productivity improvements remains of paramount importance.