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Why Best Buy Stock Just Sold Off by 4%

By Rich Smith – May 21, 2020 at 2:53PM

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This isn't how "earnings beats" usually work.

What happened

Shares of big box electronics retailer Best Buy (BBY 3.10%) sold off by nearly 6% in early trading Thursday, after reporting Q1 2021 earnings, before climbing back to about a 3.8% loss as of 2:35 p.m. EDT. Curiously, though, Best Buy's earnings were better than expected, not worse.

Heading into earnings, analysts had predicted Best Buy would earn $0.60 per share on sales of $8.35 billion. In actual fact, the company earned $0.67 per share (pro forma) on sales of $8.56 billion.  

Cartoon characters confused by stock chart arrow falling and crashing into floor.

Image source: Getty Images

So what

So why the sell-off? That's not too hard to guess.

Although Best Buy "beat" on sales and earnings in Q1, the quarter was far from an unalloyed success. Sales sank 6% year over year. As for profits, not only were actual generally accepted accounting principles (GAAP) earnings only $0.61 (and thus less than the $0.67 pro forma profit), but those profits actually shrank by 38% year over year.

Granted, COVID-19 was to blame for the decline in sales and earnings. Although Best Buy did its best to shift its business model to accommodate social distancing guidelines, introducing a "curbside-only operating model" and emphasizing sales over the internet (which grew 155% year over year in the U.S.), the final six weeks of Q1 saw a 19% decline in sales over the equivalent period from fiscal 2020.

CEO Corie Barry hailed this result as "strong sales retention" in the face of a pandemic, and I won't argue with that. Still, sales declined, and profits did, too. Whoever's to blame for that, it means Best Buy became a less valuable business as a result.

Now what

And Best Buy may remain less valuable for some time to come. Although the company has resumed "large product delivery, in-home installations and repairs in approximately 80% of U.S. ZIP codes" and reopened its stores (partially) for in-store shopping on May 4, it's not clear this will be enough to get sales growing again in Q2. Accordingly, Best Buy has "suspended all FY21 financial guidance on March 21 and are [sic] not providing guidance today."

Despite its best efforts, management says its sales in Q2 will "be pressured" just as they were in Q1, and the company still faces "a high level of uncertainty" about its future results. Judging from today's price action, investors are suffering more than a little "uncertainty" about Best Buy stock, too.  

Rich Smith 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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