A spectacular run for Best Buy (NYSE:BBY) shareholders was interrupted last week, as the last major consumer-electronics retailer still standing followed up a strong report with concerns of margins contracting over the holidays. The stock shed 11.9% of its value.
The chain's fiscal second quarter was a beauty. Enterprise revenue rose 5%, as a surprising 5.4% surge in comps was more than enough to offset the closure of a handful of namesake and Best Buy Mobile stores. A 31.2% surge in online comparable sales helped spark the uptick, as internet-fueled transactions are baked into store-level comps. The bottom line grew even faster.
It was a blowout quarter, and Best Buy's outlook for the current quarter suggests another strong showing on both ends of the income statement. However, Wall Street pros began to dial back their profit targets for the seasonally potent fiscal fourth quarter after Best Buy announced additional investments in growth initiatives through the latter half of the fiscal year and probably beyond.
Hitting the register
Best Buy stock has been a five-bagger since bottoming out in late 2012. Even after last week's stumble, the shares are still trading 30% higher in 2017. Best Buy is succeeding in gaining market share, something that seemed unthinkable for a bricks-and-mortar chain just a few years ago. CEO Hubert Joly has succeeded in giving a fading outfit a new lease on life. However, buoyant share prices come with equally high expectations, and right now there's uncertainty about Best Buy's long-term sustainability and the costs to make that happen.
For now, Best Buy's making things work despite last week's decline. It has now beaten Wall Street's profit forecasts by double-digit percentage margins for six consecutive quarters. It's growing, even as it sheds some underperforming locations. Income investors may also appreciate the stock's yield that ballooned to a reasonable 2.5% after last week's drop.
The long-term concerns are real. Best Buy should fare well in the current quarter with the new iPhone, and if the economy and housing market hold up, it should attract a good chunk of customers picking up new appliances, TVs, and the next Xbox console that rolls out in November.
The future is where things get murky, and it's why these stock setbacks will happen even when it seems as if the retailer is doing everything right.