Best Buy (BBY 0.22%) was one of the most resilient brick-and-mortar retailers throughout the pandemic. Its sales of PCs and other consumer electronics soared as more people worked from home, while its timely e-commerce investments supported its accelerating digital sales.
But as the lockdowns ended and more people returned to work, Best Buy's growth stalled out. After closing at an all-time high of $134.11 per share last November, its stock price tumbled back to the low $70s.
Image source: Best Buy.
That decline was painful, but it also reduced Best Buy's forward price-to-earnings ratio to 12, and boosted its forward dividend yield to 4.5%. By comparison, Target (TGT 0.65%) -- which faces similar headwinds -- trades at 17 times forward earnings and pays a forward yield of 2.6%. So should investors consider Best Buy an undervalued dividend stock again?
Robust growth before and during the pandemic
Best Buy had already been generating steady growth prior to the pandemic, thanks to former CEO Hubert Joly's "Renew Blue" turnaround efforts from 2012 to 2019. Under Joly, Best Buy streamlined its inventory systems, expanded its e-commerce platform, overhauled its employee training, and leased out its floor space to major brands to attract more brick-and-mortar shoppers.
Joly's successor, Corie Barry, maintained those priorities. In fiscal 2020, which ended in February of that calendar year, Best Buy's revenue rose 2% to $43.6 billion as its enterprise (total) comparable store sales increased 2.1% and its domestic online comps grew 17%. Its adjusted operating margin expanded 30 basis points to 4.9%, while its adjusted earnings per share (EPS) climbed 14%.
Its revenue rose 8% another to $47.3 billion in fiscal 2021 as its enterprise comps rose 9.7% and its domestic online comps surged 144%. Its adjusted operating margin expanded again to 5.8% as its adjusted EPS jumped 30%. It attributed most of that growth to elevated demand for computers, home appliances, and other products throughout the pandemic.
That momentum continued in fiscal 2022 as its revenue grew 10% to $51.8 billion. Its enterprise comps rose 10.4%, but its domestic online comps decreased 12% against its feverish growth during the height of the pandemic. Its adjusted operating margin rose to 6%, while its adjusted EPS grew 27%.
But it now faces a tough post-pandemic slowdown
At the end of fiscal 2022 (Jan. 29, 2022), Best Buy told investors to brace for a slowdown in fiscal 2023 as its pandemic and stimulus tailwinds faded away. But throughout the first two quarters of fiscal 2023, it repeatedly reduced that guidance as it faced tougher inflationary and supply chain challenges:
|
Period |
Q4 2022 |
Q1 2023 |
Q2 2023 |
|---|---|---|---|
|
Revenue Growth Forecast (FY 2023) |
(2%-5%) |
(4%-7%) |
N/A* |
|
Enterprise Comps Growth Forecast (FY 2023) |
(1%-4%) |
(3%-6%) |
(11%) |
|
Adjusted Operating Margin Forecast (FY 2023) |
5.4% |
5.2%-5.4% |
4% |
|
Adjusted EPS Growth Forecast (FY 2023) |
(9%-12%) |
(10%-16%) |
N/A* |
Data source: Best Buy. *Not updated. FY = Fiscal year.
As a result, analysts now expect Best Buy's revenue and adjusted EPS to decline 10% and 37%, respectively, in fiscal 2023. As it laps the pandemic and stimulus checks, inflationary headwinds will likely further throttle its sales of higher-ticket items like consumer electronics and home appliances.
During its latest conference call, Corie Barry said Best Buy currently faces a "really volatile macro environment" in which "very uneven" consumers are prioritizing their purchases based on "how long inflation lasts." Markdowns and higher freight costs will also squeeze its near-term margins.
Walking back its 2025 targets
Three years ago, Best Buy predicted it would generate $50 billion in revenue by fiscal 2025, with an adjusted operating margin of 5%. It actually surpassed $50 billion in revenue in fiscal 2022, but analysts expect it to drop back below that threshold again in fiscal 2023 and fiscal 2024.
That's why it wasn't surprising when Best Buy abandoned those expectations in the second quarter. During the conference call, Barry said the company would revise those expectations once it started to "experience a more stable operating environment."
Its stock could stay stuck in the mud
Best Buy's inventory levels actually declined 6% year over year in the second quarter, so it isn't drowning in excess inventory like Target and other big-box retailers. It's also firmly profitable, and it's offsetting some of the near-term pressure on its gross margins by generating higher-margin revenue from its private label brands and co-branded credit cards.
Analysts expect its adjusted EPS to dip to $6.28 per share, but that should still easily cover its forward annual dividend of $3.52 per share. It also paused its buybacks during the second quarter to conserve additional cash, and it's started to restructure its business to cut costs as its growth cools off.
All this suggests Best Buy merely faces a cyclical slowdown instead of an existential crisis. However, its stock could remain stuck in the mud for the foreseeable future until its growth stabilizes again. Its low valuation and high yield will likely limit its downside potential, but I'd rather stick with more promising stocks than wait for Best Buy's eventual turnaround.
