Why Investors Are Keeping a Keen Eye on 1 Large Retail Stock

Best Buy's (BBY 0.72%) stock is trending lower along with the market, but should investors be concerned? In this Motley Fool Live segment from "3-Minute Stock Updates," recorded on July 11, Fool.com contributors Travis Hoium and Ryan Henderson take a closer look at Best Buy's stock. 

Travis Hoium: Here's another one that in this retail space that we have so many questions about, but they had a different result in the first quarter than a company like Target. Target sells, obviously, a lot more products. Best Buy focused on electronics, and they actually had some of the headwinds that other companies have seen more directly hit them in the first quarter. Sales were down 8.2 percent, and then I think same-store sales were down 8.0 percent as well, so that was a really notable number for them but actually beat estimates from both the revenue and earnings standpoint. So I think that's interesting to think about from a context on where we've been over the last few weeks and months. The stock has trended a little bit lower, but this is what we've seen as well with the stock market in general, with interest rates rising and potential slowdown in the economy. Not a ton of releases from them, but a couple of notes that I did have.

It does seem like they are offering some larger than normal discounting, specifically, in areas like smartphones. They recently had their Black Friday in July sale, which could potentially be an advantage because they're able to clear out some of the inventory that they had. I know one of the concerns coming out of the first quarter was they had this issue where you have slowing sales, but then you still have some supply chain issues and other pieces in the market, so do you end up in a spot with a target where you have too much of a certain inventory but not enough of another inventory? So that could be an opportunity for them to clear that out.

But I would say this seems like a company that's going to be a leading indicator in the transition from work from home to a more normal working environment because they had a lot of that pain that we've seen from spending cuts or transitions early on, and so maybe we're entering a little bit more of a normal environment. But yeah, I didn't see it. There wasn't a ton of news out about them over the last few weeks so not any major updates, but I'm sure we'll see what same-store sales look like when second quarter results come out in a couple of weeks.

Ryan Henderson: So inventory liquidation isn't great for shareholders, but it's pretty cool for consumers, it sounds like, so maybe some deals on smartphones. What do you make of that situation because it sounds like they had a lot of inventory that they had a sell-through? Do you think it's the right thing to do a discounted day in July?

Travis Hoium: Yeah. I look back, I guess they have done this before. But I was just shocked to see, and apparently, back-to-school shopping is starting already, which has shocked me as a parent to a new kindergartener next year. But inventory is one of these challenging things, but especially in the electronic space, you almost have to rip the Band-aid off and get it over with now because having a two-year-old smartphone sitting in inventory is just losing value anyways, so you might as well get it out the door if you can, or maybe in a little bit different situation, if you have furniture that maybe doesn't lose its value in the same way, so yeah, I think flush as much out as you can get to a normalized inventory level.

But it will also be interesting to see they have a very big B2B business and that, as people go back to the office, maybe we see some upgrades from that environment as well. So that could be a little bit of a tailwind for them. But inventory is going to be a challenge for everybody over the next year. I think that's just going to be a theme from earnings season.

Ryan Henderson: I'm curious, do you have any numbers on Best Buy's valuation at all? I imagine this is one that's been sold off fairly harshly in the recent environment.

Travis Hoium: I just closed that window. It hasn't sold off as much as a bunch of tech stocks, have about $16 billion valuation, and their trailing PE is 7.8 and a dividend yield of five percent, so pretty attractive from a valuation standpoint. The question is going to be, that's a valuation from a company that's revenue is on decline. So the E part of the PE ratio is probably earnings are going to get worse, so forward PE is going to be higher than the trailing PE from that perspective. So that would be one question I have while thinking of it just strictly as a value stock.