Best Buy (BBY 0.20%) isn't done feeling the impact of its pandemic growth hangover. Sales fell at a double-digit rate in the selling period that ended in late July, in fact, and profitability dove compared to soaring results a year earlier.
The retailer might also be facing some inventory challenges heading into the critical holiday shopping season that will pressure earnings even more in late 2022. But can investors safely look past these issues toward a brighter long-term growth outlook for the leading consumer electronics retailer?
Best Buy is seeing a tough selling environment
You don't have to search hard to find evidence of a poor selling environment in the consumer electronics space. After sales jumped 20% in the second quarter of fiscal 2022, Best Buy gave much of that spike back in fiscal 2023. Revenue in the second quarter (which ended July 31) fell 12.1% year over year, with the computing and consumer electronics segments shrinking the fastest. The appliances division fared the best, but even that niche fell 1% compared to a 31% spike a year ago.
The main concern is that Best Buy could be losing its competitive advantage, but executives expressed more confidence about the strength of the business. The online division, for example, is holding steady at an impressive 31% of sales, or double the pre-pandemic sales rate.
And parts of the portfolio, like appliances and services, are holding up relatively well. "We are clearly operating in an uneven sales environment," CEO Corie Barry said in a press release.
Best Buy is taking the profit hit
There has been a stiff financial penalty associated with the demand slump. In Q2, gross profit margin was down to 22% of sales from 23.5% last year, and expenses are jumping as a percentage of sales.
These factors have combined to push operating income down to 4.3% of revenue compared to 6.7% a year ago, potentially erasing a major pillar of the investing thesis for the stock. Best Buy's earnings power seemed much stronger in calendar year 2021 when the business was aiming for high-single-digit operating profit margins. Today that rate is headed for just 4% of sales.
Looking ahead
Best Buy is looking into potentially big strategic shifts that suggest today's tough selling environment might not be simply a short-term challenge. Executives say they're considering more aggressive cost cuts and potential changes to the operating model.
In any case, sales are now expected to decline by a bit more than 12% for the full fiscal 2023 (ending Jan. 31, 2023) as profitability moves to around 4% of sales. The chain isn't alone in seeing these pressures. Walmart and Target shareholders are enduring similar demand and earnings slumps.
Best Buy's more focused portfolio allowed it to achieve faster sales growth in earlier phases of the pandemic. But now it is causing bigger declines to the business as consumers prioritize spending in other areas like travel. The retailer's sales might stabilize over the next few quarters, and there is little risk of a major financial pinch hitting this profitable business.
Still, investors will have to be patient, and sit through plenty of volatility, as they wait for signs that Best Buy is back on a path toward rising sales and expanding profit margins.
