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Why Best Buy Co Inc Stock Sank Today

By Jeremy Bowman - Updated May 24, 2018 at 6:05PM

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Shares of the electronics retailer dropped after its outlook disappointed investors, in spite of a strong record.

What happened

Shares of Best Buy Co (BBY 4.77%) finished lower today after the electronics retailer posted strong results in its first-quarter earnings, but offered a weak outlook. The subsequent sell-off fit a pattern this earnings season as retailers have widely reported strong first quarters, but many of the sector's stocks fell on the news as investors remain skeptical about brick-and-mortar retailers.

Best Buy closed the session down 6.7%.

A store employee helps a customer with mobile phones.

Image source: Getty Images.

So what

Comparable sales in the quarter surged at Best Buy, climbing 7.1%, a sign that the company's focus on customer service and mobile tech is continuing to resonate with shoppers. Overall revenue increased 6.8% to $9.11 billion, which was well ahead of $8.74 billion. 

Domestic gross margin fell 30 basis points thanks to rate pressure in mobile phones, and adjusted earnings per share surged from $0.60 to $0.82, due in part to a lower tax rate from the new tax law, above estimates at $0.74.

CEO Hubert Joly said the results beat the company's own expectations and said performance was strong across the board. He added:

The top-line strength is the result of continued healthy consumer confidence, product innovation in multiple areas of technology, and our unique value proposition resonating with customers. We are executing well, and customers are responding positively to the unique experience we provide to them online, in stores and in their homes.

Now what 

Despite that statement, Best Buy declined to raise its guidance for the full year, calling for comparable sales of just flat to 2%, a sign that comps could be negative for the remainder of the year. That projection seemed to spook Wall Street even though management may have simply been being conservative as it said it did not update its full-year guidance because it was still "early in the year."

The company also maintained full-year adjusted EPS guidance of $4.80 to $5.00, representing 9% to 13% growth. Given the strong quarterly numbers, it's hard to fault Best Buy; however, retail stocks will continue to trade at low valuations as long as Wall Street remains skeptical of their long-term viability.

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Best Buy Co., Inc. Stock Quote
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