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Dead Stock Walking: Best Buy Has Nowhere to Go but Down

By Rick Munarriz - May 29, 2018 at 10:10AM

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The consumer electronics retailer hit an all-time high before tumbling after a disappointing financial report. It's all downhill from here.

One of last week's biggest losers was Best Buy (BBY 2.43%), shedding 12.5% of its value after posting its latest quarterly report. The consumer electronics retailer delivered what seemed to be blowout financial results at first glance, but sticking to its earlier guidance is in effect lowering its prognosis for the remaining nine months of the fiscal year. 

Best Buy investors probably aren't feeling too bad. The stock hit fresh all-time highs a week earlier, and even after its post-earnings hit, the stock has still more than doubled over the past two years. Best Buy stock is a six-bagger since bottoming out five years ago. It's been an amazing turnaround story since Hubert Joly came in to steer the chain away from the brink of Circuit City-ness.

However, it's hard to get excited about the future when it comes to Best Buy. Getting back to the highs it hit earlier this month won't be easy, and last week's dip may be the first of many rough weeks for investors. 

Best Buy store

Image source: Best Buy.

Thinking outside the big box

Best Buy may seem to have been firing on all cylinders until last week's disappointing guidance, but the stock has actually sold off after three of its past four quarterly reports. Expectations are high, and we're starting to see that Best Buy isn't always up to the challenge. 

The superstore chain had a great fiscal first quarter. Enterprise revenue rose 6.8%, fueled entirely by a 7.1% surge in same-store sales. It wasn't perfect. Online sales growth decelerated to 12% for the quarter. Then we get to Best Buy reiterating its guidance calling for flat to 2% growth in comps for all of fiscal 2019. After the first quarter's better than 7% rise and a 3% to 4% uptick targeted in the current quarter, the implication here is that the second half of the year will revert back to negative comps. 

There's been excitement about Best Buy 2020, the long-term vision the chain outlined in its first investor day in five years last summer. The strategy calls for additional cost savings, as well as branching out with more services. Diversifying from merchandise sales makes sense in an operating climate that continues to favor the pure internet retailers with kinder overhead to cover, but a lot of things have to go right for Best Buy. 

Best Buy stock may seem cheap at 14 times the midpoint of this year's earnings guidance, but let's take a closer look at this outlook. The $41 billion to $42 billion in enterprise revenue that it's eyeing is actually slightly below last year's top-line results. Yes, there was an extra week in fiscal 2018, but we're talking about flat results at best. Best Buy sees earnings per share rising 9% to 13%, but keep in mind that Best Buy's share count has declined by 8.5% over the past year. In other words, actual earnings growth will likely be in the low single digits. 

This is the Best Buy that investors bid up to an all-time high last week. It's not warranted. Joly is doing a great job, but this is still a company ringing up a lot less in sales than it did when it peaked in fiscal 2011. The slow fade is commendable, but the scenario where Best Buy is more relevant in a few years than it is now is misguided. Kudos if you cashed out when Best Buy was hitting all-time highs earlier this month. The road ahead will only get harder. 

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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