Best Buy's Earnings Provide a Glimpse Into the Consumer Market's Future

Best Buy's (BBY -0.81%) business was booming during the pandemic, but its most recent earnings report showed sales and earnings slowing down. In this video clip from "The Virtual Opportunities Show" on Motley Fool Live, recorded on May 24, Fool.com contributors Demitri Kalogeropoulos, Travis Hoium, and Jose Najarro discuss how the specialty retailer is adjusting to different consumer shopping habits than it saw over the past few years.

Demitri Kalogeropoulos: Best Buy reported their earnings today, comparable store sales were down 8% based on last year, which can sound like bad news. But remember, comps were up 37% a year ago, so we're still way above where they were before the pandemic hit and Best Buy's earnings were down but nothing terrible.

Their non-GAAP operating margin is around 5% of sales versus around 6% it was about a year ago and management was forecasting that would be dropping anyway, it wasn't quite as big of a hit as companies like Target (TGT -0.70%) reported earlier or last week.

But the company did say that it's noticing similar to what Target said a few days ago. Best Buy is noticing that consumers are spending more, they are still shopping. They're very eager to go out there and shop. But they're changing their priorities a lot. They are shifting, spending a little bit more toward, like we were saying, away from these products that they were spending money on last in the last year.

They're not buying home theater, was a drop. Appliances were a pressure point for them. They had to do some discounting on things like PCs. Obviously, there's still not enough supply for things like gaming consoles. All that stuff combined to add a bit of a negative trend there.

They did lower their sales expectations a bit. They were projecting comps to drop, I think it was somewhere between 3% and 1%. Now they're saying between 4% and 6%. A modest decline, but they were projecting lower sales this year anyway compared to the last few years. We're still looking at a good overall number compared to 2019.

I think this is one of those we're going to find out over the next couple of weeks when we get updates, particularly in the second quarter. This is an unusual quarter because this quarter, a year ago we had the financial stimulus still just boosting everybody's income. It was amazing how much spending there was a year ago.

It makes sense that there'd be a little bit of a step back right now. The big question everyone is just worried about is that step-down going to continue over the next couple of quarters? Or are we just hit going to hit that normal and get back to that normal amount of spending?

Travis Hoium: Yeah, I think with reports like this, it's important to step back and think about what you would expect to happen. Not just look at the market's reaction. Of course, people aren't buying PCs and monitors for their home office and appliances because they're working at home and all this other stuff that they've been buying over the last two years. Of course, that's happening, but it is strange and painful when you see it in an earnings report.

I think it's just important to go level-set yourself and say, Best Buy seems like the perfect company that there was this pandemic boost in revenue that wasn't going to last. But if they are higher than they were in 2019, which they are then that's a win for them.

Jose Najarro: I'm curious, Demitri, did they mention which markets they're seeing still growth in or not that heavy pull down at the moment?

Kalogeropoulos: The appliance number, let me just scan down here because they do break down their revenue. They have five main categories. Computing and mobile phones is their biggest. That was up 27% last year. This year down 10%. Still well above where it was.

Consumer electronics. That's a big one. It was up 46% last year. Like Travis was saying, well, that was a period where we just bought everything we could get our hands on, all the PCs, all the tablets, all the home theater stuff. That was up 46% a year ago, down 10% this year. It skyrocketed last year to a small step-down.

Appliances, almost even bigger, that was up 70% last year, down three, or up 3%. That one is still growing. Appliances call that a win. It's still growing on top of a 70% increase. The bigger one here I'm seeing entertainment. I think that's in that category of things like smart TVs and home theater stuff. That was up 32% last year, down 14% right now.

Just by looking at this, if there is a move that people are aggressively moving away from, it seems to me that we're sitting at home digitally entertaining ourselves. I think people are done with that for a while anyway, they want to do stuff outside.

Hoium: Shocking.

Kalogeropoulos: Exactly right. Makes perfect sense, it does. Wall Street does like to overreact. It's kind of hilarious to think Wall Street does seem to take whatever number we look at today and just project it into infinity. I think they did that a year ago. They were saying, oh, all these companies are going to grow at 300% for infinity. Let's value the company like that.

Now, obviously, I think that was an overreaction. I think we're overreacting in the same way, in the negative direction. Right now they are all expecting, comps are going to drop 8% every quarter for infinity. That's a crazy idea too.