On April 14, The Wall Street Journal reported that consumer electronics retailer Best Buy (BBY 2.40%) would lay off some employees, citing anonymous sources. It was just in March that management said it had already reduced its workforce by 20% over the previous three years. If the report is true, it's bad news for Best Buy. Laying off workers isn't something that thriving companies tend to do.
Workforce reduction (no matter what levels), as well as other concerning metrics, are offering indications that Best Buy's business is sluggish right now. And yet, other indicators show the company is profitable, shareholders are being rewarded, and the stock is dirt cheap.
Taken all together, what does this say about Best Buy? Does it make this stock a buy right now?
First, the stock valuation
Stocks are considered expensive or cheap based on various criteria that, taken together, frequently get referred to as a stock's valuation. With valuation, investors measure business results against the value of the stock.
For Best Buy, because it's a profitable business, it seems appropriate to look at the price-to-earnings (P/E) ratio first. In its fiscal 2023 (which ended in January), Best Buy earned a profit of $6.29 per share. Considering the stock price is about $73 per share as of this writing, Best Buy stock trades at a P/E valuation of almost 12 (share price divided by its earnings per share or EPS).
As the chart below shows, that's cheaper than the long-term average P/E valuation for Best Buy stock. Moreover, it's a steep discount to the average for the S&P 500, which is about 22 right now.
BBY PE Ratio data by YCharts
Some investors may also be valuing Best Buy stock based on its dividend. The company has increased its quarterly dividend per share for 10 consecutive years. And right now, the dividend yield is almost 5%, which is near the all-time high for this stock.
BBY Dividend Yield data by YCharts
By many investing metrics, including the two I've shared here, Best Buy stock would be considered dirt cheap. However, just because it's cheap doesn't mean it's a good long-term investment. Valuation metrics look back at what's happened recently with the business, but investors should also look to the forward opportunity of a stock.
Next, the business opportunity
As of the end of fiscal 2023, Best Buy had over 1,100 store locations worldwide. But it's closed an average of 23 in each of the past three years. Management said it anticipates closing 15 to 20 per year. The company may have survived the initial surge of e-commerce adoption, but demand for big showrooms full of consumer electronics is slowly waning. The alleged layoffs reported by The Wall Street Journal are just the latest reminder of this waning consumer demand.
Image source: Best Buy.
In its fiscal 2023, Best Buy's revenue fell almost 11% year over year to $46.2 billion, which obviously isn't ideal. But management believes it can stay relevant and even grow. Indeed, it's shooting for $53.5 billion to $56.5 billion in revenue in fiscal 2025 -- just two years from now.
Best Buy's management is counting on one thing in particular: an improvement in the consumer-electronic replacement cycle. Consumers naturally replace aging gear with new tech over time. Management says this happens every three to seven years. But most of Best Buy's consumers upgraded all at once in the early days of the pandemic. And this led to muted replacements in recent quarters.
Hopefully, this replacement cycle improves by fiscal 2025, leading to higher sales and profits.
Finally, why some might choose to buy Best Buy stock
In fiscal 2023, Best Buy had about $1.8 billion in operating income, even though it was a down year. And that happens to be how much management returned to shareholders via share repurchases and dividends.
Devoid of worthy investment opportunities for explosive growth, Best Buy's management is prioritizing shareholder returns. In just the past five years, the share count is down substantially and the dividend has more than doubled.
BBY Average Diluted Shares Outstanding (Quarterly) data by YCharts
For the sake of argument, let's assume that Best Buy's business doesn't change much over the next five years: There's little growth, but it's still profitable. Management is authorized to repurchase $4 billion more in stock, or about 25% of shares outstanding. That could boost EPS by a single-digit percentage annually. Including the 5% dividend yield, shareholders could be looking at a 10% total shareholder return annually for the next few years, even without revenue growth.
For some investors looking for positive returns and a high-yield dividend, an investment in Best Buy could be a good idea today. Personally, however, I'm looking for a higher probability of market-beating returns. And I'm not sure Best Buy has enough potential to beat the S&P 500, which is why I'd look elsewhere today.
