Best Buy Keeps Profits Flowing as Demand Crashes

Over the past decade, consumer electronics retailer Best Buy (BBY -2.19%) made some critical changes that have prepared it for the tough environment it now finds itself in. It lowered prices to prevent people from browsing in its stores and buying elsewhere; it slashed costs by removing layers of management and streamlining operations; and it emphasized providing a good customer experience.

Still profitable

Best Buy is now a nimble retailer, and that nimbleness was on display in the first quarter. Demand for nearly everything Best Buy sells is tumbling amid sky-high inflation and an economy that looks headed toward a recession.

Data source: Best Buy.

Following a boom in demand during the pandemic, people are now buying fewer PCs and smartphones. Global PC shipments crashed 30% year over year in the first quarter, and global smartphone shipments were down 14.6%. Meanwhile, homeowners are spending less on home improvement. Both Home Depot and Lowe's are now suffering sales declines, and Best Buy is seeing demand for big-ticket appliances slump.

Despite these stark sales declines, Best Buy managed to turn a solid profit during the first quarter. Gross margin increased 600 basis points year over year to 22.7%, partly due to lower sales of low-margin products like PCs and higher sales of services. Best Buy has been growing its portfolio of services and now accounts for about 6% of total sales.

The company also reduced operating costs, partly due to a round of store-level layoffs in April. Selling, general, and administrative (SG&A) expenses were down about 2% year over year, although as a percentage of revenue, they rose 1.7 percentage points to 19.5%.

Best Buy did see its operating margin contract in the first quarter, but the company still managed to convert 3.3% of revenue into operating income. That's not a bad result, given the scope of the sales declines Best Buy is experiencing.

Best Buy expects its total comparable sales to dip by 3% to 6% for the full year. This year includes a 53rd week, which will boost sales compared to last year. The company also expects to generate adjusted earnings per share between $5.70 and $6.50, down from $7.08 in fiscal 2023 and $10.01 in fiscal 2022.

Is Best Buy stock a buy?

Best Buy's profits will be down around 40% from its blockbuster performance in fiscal 2022, which ended in January of that year. But even with this steep profit decline, the stock is reasonably priced based on earnings.

Best Buy stock trades for about 12 times the midpoint of the company's full-year earnings guidance range. That's certainly not expensive, especially considering profits are already depressed. Investors also receive a generous dividend. Best Buy's latest quarterly dividend of $0.92 per share is good for a dividend yield that tops 5%. That dividend is well covered by earnings.

Buying Best Buy stock today could pay off in the long run, but it will be a rough road for the time being. For revenue and profits to return to growth, the economic picture must brighten, and new products need to light a fire under consumers. Innovation in the smartphone market has slowed -- new iPhones aren't driving upgrades like they used to.

Best Buy is a well-run retailer, and the stock has plenty of pessimism baked in. For long-term investors, investing in Best Buy stock looks like a decent idea.