Is Now the Right Time to Add Best Buy Stock?

Share prices of Best Buy (BBY -0.81%) surged 13% on Nov. 22 after the big-box retailer posted its latest earnings report. In the third quarter of fiscal 2023, which ended on Oct. 29, revenue fell 11% year over year to $10.59 billion but still beat analysts' estimates by $290 million. Its adjusted earnings per share (EPS) declined 34% to $1.38 but also topped the consensus forecast by $0.36.

Those numbers look weak, but Best Buy had already told investors to brace for a slowdown in fiscal 2023 as it faced tough comparisons to its pandemic and stimulus-induced growth over the past two years. Its stock had also declined more than 40% over the past 12 months in response to that deceleration. So is it finally time to take the contrarian view?

Image source: Best Buy.

Why did the pandemic boost Best Buy's sales?

In the years preceding the pandemic, Best Buy refreshed its business by expanding its e-commerce platform, streamlining its inventory systems, overhauling its employee training, and leasing out its floor space as showrooms for leading brands to attract more brick-and-mortar shoppers.

Those efforts prevented it from being crushed by the "retail apocalypse," which wiped out many of its big-box retail peers. Its soaring digital sales also offset the slowdown in brick-and-mortar shopping during the pandemic. Best Buy also benefited from stay-at-home trends throughout the pandemic as consumers bought new PCs for gaming, remote work, and online classes. They also upgraded their TVs and other big-ticket consumer electronics as they spent more time at home. 

As a result, Best Buy's revenue rose 8% to $47.3 billion in fiscal 2021 (which ended in January 2021), as its enterprise (total) comparable-store sales (comps) increased 9.7% and its domestic online comps surged 144%. Its adjusted operating margin expanded 90 basis points to 5.8% as its adjusted EPS jumped 30%

In fiscal 2022, Best Buy's revenue grew another 10% to $51.8 billion. Its enterprise comps rose 10.4%, but its domestic online comps declined 12% as consumers started to pivot from online toward offline shopping again. Its adjusted operating margin expanded 20 basis points to 6%, and its adjusted EPS grew 27%.

How rough was Best Buy's post-pandemic slowdown?

Unfortunately, Best Buy's enterprise comps growth remained negative throughout the first three quarters of fiscal 2023. Its adjusted operating margins also consistently declined sequentially and year over year. That slowdown was caused by tough comparisons to the pandemic period as well as inflationary headwinds for discretionary purchases. 

Data source: Best Buy. YOY = year over year; bps = basis points.

At the end of fiscal 2022, Best Buy predicted its enterprise comps would dip 1% to 4% in fiscal 2023 as its adjusted operating margin slipped 60 basis points to 5.4%. Unfortunately, it didn't properly anticipate the rampant inflation and supply chain disruptions that actually occurred this year.

As a result, Best Buy reduced its full-year enterprise comps forecast to a 3% to 6% decline in the first quarter of fiscal 2023, followed by an even steeper reduction to an 11% decline in the second quarter. That's why investors breathed a sigh of relief when Best Buy slightly raised its full-year comps guidance to a 10% decline in its latest quarterly report. 

In the second quarter of fiscal 2023, Best Buy reduced its full-year adjusted operating-margin guidance to just 4% as it grappled with promotions and higher freight costs. But in the third quarter, it predicted its full-year adjusted operating margin would come in slightly higher than 4%. It also said that it restarted its stock buybacks in November (after pausing them in the second quarter), and was on track to repurchase approximately $1 billion in shares for the full year.

Is Best Buy's stock bottoming out?

Best Buy's growth could remain volatile, but its comps are still increasing relative to its pre-pandemic levels in fiscal 2020. For example, it reported that enterprise comps declined 12.1% in the second quarter and 10.4% in the third quarter, but both figures actually grew about 8% relative to the pre-pandemic second and third quarters of fiscal 2020.

Unlike other big-box retailers like Target, which are buckling under rising inventories, Best Buy's inventories actually shrank nearly 15% year over year in the third quarter. During the latest conference call, Best Buy CEO Corie Barry said that even though aligning inventory levels with uncertain and evolving customer demand was "always challenging," the company was still well positioned to react quickly to any changes in consumer demand.

Management's slight revisions to its full-year forecast indicate the situation isn't as dire as it previously telegraphed during the summer. Its stock also looks dirt cheap at 10 times forward earnings and pays a hefty forward dividend yield of nearly 5%. Based on this, I believe Best Buy's stock is finally bottoming out at these levels -- and that it's a cheap dividend play for value-seeking income investors as the bear market drags on.