Best Buy Stock Is on a Roll, but Is It a Buy?

The electronics retailer is bucking the industry trend, but the stock may be outrunning the business fundamentals.

Nicholas Rossolillo
Nicholas Rossolillo
Jun 2, 2017 at 12:37PM
Consumer Goods

Best Buy's (NYSE:BBY) stock has come close to doubling in price since hitting lows this time last year, and it is a top performer in a retail industry beset with headwinds. For Best Buy, selling technology while stuck in old fashioned brick-and-mortar has been criticized, including by me, but the company's recent performance is proving analysts wrong.

BBY Chart

Data by YCharts.

Traditional retail out-of-favor

The company's performance as of late flies in the face of the retail sales numbers put out each month by the U.S. Census Bureau. Monthly retail sales at electronics and appliance stores have been in steady decline for quite some time now.

Metric 2014 2015 2016 2017 YTD
Electronics and appliance stores sales growth (YOY) 0.5% (1.4%) (4.4%) (3.0%)

Data source: U.S. Census Bureau's Retail Sales Report. Chart by author.

After a slew of store closures and bankruptcies, the declining national chains may be to blame for the ugly looking industry sales figures -- Best Buy hasn't exactly done anything to bring up the industry average, either.

BBY Revenue (TTM) Chart

Data by YCharts.

That's what makes the recent stock performance so confounding. But sometimes, simply surviving is good enough, as even a blind squirrel sometimes finds a nut.

Best Buy bucks the trend

In the most recent quarter, revenue rose a mere 1% year over year. That's not much, but the company has been working to cut overhead costs. As a result, even the slightest bump in revenue would end up having an outsized effect on the bottom line. Earnings per share from continuing operations, which backs out one-time items, increased 40%.

Also a big improvement were comparable-store sales, which were up 1.4% stateside and 4% internationally. The domestic figure was especially helped with the online division, which grew 22.5%. Across the company, comps increased 1.6%.

Metric 2014 2015 2016 2017 YTD
Comparable-store sales growth (YOY) 0.5% 0.5% 0.3% 1.6%

Data source: Best Buy quarterly earnings reports. Chart by author. 

Management sees the trend continuing into the next quarter, with comparable sales up 1.5% to 2.5%. Back in March, management also said it would repurchase $3 billion worth of shares over the next two years.

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What it means for investors

Best Buy isn't out of the woods yet, though. The company needs to prove it can sustain top-line sales growth if it wants to keep this party going. Online sales have been doing their part, but the traditional stores continue to lag behind. A few new initiatives were announced, like a smart-home service with partner Vivint, and the pilot In-Home Advisor program to help families implement new tech in their home is slated to go nationwide by the end of the year. We'll have to wait to see if that translates into new business.

A new Best Buy store with blue store front and yellow tag logo.

Image source: Best Buy.

It's also worth noting that the cost of goods sold increased 3.3% this last quarter, which helped the top line grow but otherwise ate into profits as the figure outpaced overall revenue growth of 1%. That's another unsustainable trend if the current stock price run is to advance further. Ultimately, this game is all about profits.

After the joyous response to first-quarter results, I'm taking a wait-and-see approach to Best Buy. The tech retailer is showing signs of life, and a few competitors going away is an added bonus. But buying now feels like it would be chasing after an improving business that Wall Street has already baked into share prices.