Shares of consumer electronics retailer Best Buy (BBY -0.25%) are down about 45% from their pandemic-era high. There's a good reason. Demand for much of what the company sells has tumbled in the post-pandemic economy.
A tough environment
Best Buy's results for the second quarter, which ended on July 29, were a bit better than what analysts were expecting. Revenue was down 7.2% year over year, driven by a comparable sales decline of 6.2%. Sales were weak in Best Buy's stores and online, with domestic online sales down 7.1%.
In the domestic segment, computing and mobile phone comparable sales slumped 6.4%, while consumer electronics comparable sales dropped 5.7%. Appliance sales fared the worst, not too surprising given the state of the housing market, with a 16.1% comparable sales decline.
These sales declines are occurring against a backdrop of a very weak market for PCs and sluggish demand for smartphones. While the PC market is starting to show signs of bottoming out, global shipments were still down 13.4% year over year in the second quarter. Consumers are also holding off on smartphone upgrades, with second-quarter shipments down 7.8%.
While Best Buy's profit declined along with revenue, the company managed to maintain solidly positive profit margins even as sales tumbled. Gross margin edged up 1.1 percentage points to 23.2%, and the company maintained an operating margin of 3.6%. After going through a turnaround last decade, Best Buy is now a far more efficient retailer than it was in the past.
Best Buy lowered its revenue outlook for the full year while boosting its guidance for operating margin. The company now expects comparable sales to decline between 4.5% and 6%, which will drive revenue between $43.8 billion and $44.5 billion. Adjusted operating margin is now expected between 3.9% and 4.1%, with the low end of that range boosted by 20 basis points from the company's previous outlook.
Time to bet on a turnaround?
Best Buy CEO Corie Barry believes that 2023 will mark the low point in demand for the core products Best Buy sells. Barry expects demand to stabilize next year, with growth possible depending on new products that are launched. While consumers are pushing back PC and smartphone upgrades after splurging during the pandemic, consumer behavior should eventually normalize.
A prolonged economic slump could derail that normalization. While the U.S. has avoided a recession so far, even with surging inflation and spiking interest rates, a downturn is still possible next year. One thing that could sting retailers like Best Buy is the return of federal student loan payments. Millions of borrowers will need to restart payments in October, which could further reduce demand for devices and gadgets.
This situation will eventually pass, and Best Buy has a strong enough balance sheet to weather the storm. The company had $1.09 billion in cash and long-term debt of just $1.15 billion at the end of the second quarter. Best Buy's free cash flow was negative through the first six months of the year, but that's not too worrying given that this period doesn't include the holiday season.
Best Buy expects to report adjusted earnings per share between $6.00 and $6.40 this year. For comparison, the company reported adjusted EPS of $10.01 in fiscal 2022, which ended in January of that year and benefited from pandemic-era demand.
Based on Best Buy's current stock price, the price-to-earnings ratio at the midpoint of the company's guidance range is about 12. That looks like a reasonable price to pay. Best Buy is an efficient retailer that's wringing out profits despite operating in the worst demand environment for quite some time.
It may take multiple years for earnings growth to return, but for patient long-term investors, Best Buy stock looks like a solid turnaround play.
