Best Buy’s Turnaround Is Gaining Traction, But Wall Street Still Needs Proof

Key Points

• Best Buy’s fiscal first-quarter results showed stronger comparable sales, improved earnings and steady full-year guidance.
• Best Buy Ads, Marketplace, services, gaming, computing and mobile phones helped offset pressure in appliances and consumer electronics.
• Best Buy’s dividend and improving execution may appeal to patient investors, but analyst caution and leadership changes limit near-term upside.

Best Buy NYSE: BBY is accomplishing what many thought unlikely.

After a pandemic-fueled surge came and went, the company is showing signs of stabilizing sales and online momentum. Rather than another big-box victim, it is focused on improving its margins and expanding its business. And it is maintaining strong profitability despite sluggish consumer electronics demand.

In fact, the most-recent three month results came in above what most analysts expected. Comparable store sales rose. And management reiterated full-year guidance with enough specifics to suggest the direction had changed.

Investors who had written off the company as too old-fashioned might be surprised by the evidence that arrived. Whether now is the time to jump into the stock depends a lot on what happens next.

Best Buy Delivers Better-Than-Expected Results

Best Buy’s first fiscal quarter, which ended on May 2, tells a solid story of incremental progress across a number of key pursuits.

Revenue beat expectations and reached $8.94 billion in the quarter, up from $8.77 billion a year earlier, and reversing a fourth-quarter slide during the key holiday season. Adjusted diluted earnings per share climbed to $1.28 from $1.15, also above what analysts expected. Reported net earnings climbed more than one-third to $276 million from $202 million a year earlier.

Comparable sales rose 2%, more than the company had anticipated and in contrast to a drop of 0.7% in the year-ago period. Domestic revenue increased 1.5% to $8.25 billion, with domestic comparable sales up 1.8%.

Operational results were also encouraging. Operating income reached 4.1% of revenue, the company’s domestic gross margin expanded to 23.7% from 23.5%, and adjusted selling, general, and administrative (SG&A) expenses as a share of domestic revenue edged down to 19.3% from 19.4%.

Those were not big changes, but in retail, those fractions of a percentage point matter. Extracting more margin from a little more revenue shows positive direction, even if the headline numbers don’t show a big change.

New Growth Businesses Are Gaining Momentum

Where the growth came from is perhaps more important than the growth itself. The company said its biggest contributors to comparable-sales gains were gaming, computing, mobile phones, and services, categories with momentum. In contrast, sales of consumer electronics slid slightly while appliances fell nearly 14%.

The recent numbers also gave proof that the company’s recent strategy is delivering. Best Buy Ads, which promotes brands and products through Best Buy’s customer base, and the company's online Marketplace, which hosts third-party sellers, also delivered strong performances. For lines of business that barely existed a few years ago, the company is nicely expanding its profile beyond TVs and computers.

Results from the company’s international operations were also encouraging. Revenue in that segment rose 7.3% to $687 million, led by 4.7% sales growth and the rest attributable to favorable foreign exchange rates.

Wall Street Remains Cautious

Best Buy is also regaining investor attention. Shares are up more than 16% since the start of the year, but the stock still trades below $80, well under its level above $100 less than two years ago and below its 52-week high near $85.

Even with the recent results, analysts remain cautious. Of the 22 analysts following the company, the average rating is a Hold on the stock. Six analysts say Buy, 14 suggest Hold, and two recommend Sell.

With a 12-month average price target of $79.50 per share, analysts see only limited upside from recent trading levels.

Risks Continue to Limit the Upside

The recommendation to Hold is also a reflection of other possible factors.

Best Buy raised its quarterly payout by 1 cent to 96 cents per share in March and paid $202 million in dividends in the first quarter. That represents an over 5% yield based on current prices.

But the company’s guidance for 2027, though solid and suggesting that the improvement is durable, is roughly flat compared to the results reported last year.

The bear case has also not completely disappeared. The retail sector is notoriously volatile. And with the housing market not helping, the decline in appliance sales, which now represents 10% of its business, is not likely to recover anytime soon.

The broader competitive pressure from e-commerce, warehouse clubs, mobile carriers, and direct-to-consumer brands is also as real as it has ever been. Amazon NASDAQ: AMZN, Walmart NASDAQ: WMT, Costco NASDAQ: COST, and Apple NASDAQ: AAPL each compete for the same shoppers.

Another question hanging over the company is some recent changes in senior management. Best Buy changed both its future chief executive officer and its chief financial officer within a short span.

The company has announced that Jason Bonfig, who oversees merchandising, ecommerce, marketing, supply chain, Best Buy Canada, and Best Buy Ads, will succeed Corie Barry as CEO at the end of October. The company’s chief financial officer will also step down at the end of July.

Best Buy's Comeback Still Needs More Proof

Patient investors attracted by high dividends and a leading brand retailer are likely paying attention. With execution improving and its expansion of profit pools, Best Buy is making a credible case. Profits are up, and its efficiency strategy appears to be working.

Other investors might want more proof. A leadership transition and a muted sales trajectory make a quick run-up unlikely in the near term. Waiting for results from another quarter or two might be the smart move to ensure the comeback is real.