Best Buy Stock: Buy, Sell, or Hold?

Best Buy's (BBY -1.27%) stock ticked up by 3% after the company delivered its latest earnings report. In its fiscal 2024 first quarter, which ended on April 29, the big-box retailer's revenue dropped by 11% year over year to $9.47 billion, missing analysts' estimates by $60 million. Its adjusted EPS fell by 27% to $1.15, but beat the consensus forecast by $0.05 per share.

Best Buy's growth rates seem sluggish, but they cleared Wall Street's low bar, which had been adjusted to account for the near-term macroeconomic headwinds. Let's review the key facts to see if investors should buy, sell, or hold this retail stock.

Image source: Best Buy.

What happened to Best Buy?

Best Buy experienced a major growth spurt during the first couple of years of the pandemic as consumers bought new PCs to attend online classes, work remotely, and play graphically intensive video games. They also bought more TVs, streaming media devices, and other consumer electronics as they spent more time at home. Best Buy's e-commerce expansion over the past decade also enabled it to offset its slower brick-and-mortar sales with accelerating digital sales.

As a result, Best Buy's revenue rose 8% in its fiscal 2021 (which ended in January 2021), driven by its 9.7% growth in enterprise (domestic plus international) comps. Its adjusted operating margin expanded to 5.8% while its adjusted EPS surged by 30%.

In its fiscal 2022, Best Buy's revenue rose 10%, its enterprise comps grew 10.4%, its adjusted operating margin expanded to 6%, and its adjusted EPS increased by another 27%. Investors were dazzled by those growth rates and bid its stock to a record high of $129.56 on Nov. 22, 2021. But today, the shares trade at about $71 -- 45% below their peak.

Best Buy lost its luster for two reasons. First, sales of new PCs fell off a cliff as social distancing efforts were relaxed and people physically returned to schools and workplaces. Second, inflation broadly curbed consumer spending on big-ticket items like TVs and appliances.

In its fiscal 2023, Best Buy's revenue declined 11% and its enterprise comps fell 9.9%. Its adjusted operating margin shrank to 4.4% as its adjusted EPS plunged by 29%. It also got off to a rough start in fiscal 2024. Its 10.1% slump in enterprise comps in fiscal Q1 was the retailer's sixth consecutive quarter of declining enterprise comps. Its adjusted operating margin also fell sequentially and year over year to 3.4%.

Data source: Best Buy. YOY = year over year.

Best Buy management expects those headwinds will persist. For the full year, it expects revenue to decline by 2% to 5%, enterprise comps to dip 3% to 6%, adjusted operating margin to shrink to 3.7% to 4.1%, and for adjusted EPS to slide 8% to 19%.

So why would anyone buy Best Buy's stock?

Best Buy's growth is likely to remain sluggish until the macro environment improves, but the bulls believe it's approaching a cyclical trough. It also isn't drowning in unsold products like some other big-box retailers: Its inventory levels actually declined 14% at the end of fiscal 2023 and dropped 17% year over year in the first quarter of fiscal 2024.

More importantly, Best Buy isn't aggressively flushing out those inventories with margin-crushing promotions. During the Q1 conference call, CEO Corie Barry said the company was "now fully normalized to pre-pandemic levels from both the percent of products being promoted and the depths of promotions."

Furthermore, Barry predicted that calendar 2023 would mark the "bottom for the decline in tech demand" and that the company's quarterly comps growth would "improve" throughout the rest of fiscal 2024 as it lapped its post-pandemic slowdown. That outlook suggests it might be a good idea to buy Best Buy's stock before its growth accelerates again.

The stock also looks historically cheap, with a low forward price-to-earnings ratio of 12 and a high forward dividend yield of 5.3%. That combination of low valuation and high yield could limit its downside potential until its cyclical downturn finally ends.

By comparison, Target (TGT -0.37%) trades at 18 times forward earnings and pays a lower forward yield of 2.9%. Walmart (WMT 1.18%) has a higher forward multiple of 25, but pays an even lower forward yield of 1.5%.

Is it time to buy, hold, or sell Best Buy?

If you already own Best Buy, there's no reason to sell it while it's trading at such a steep discount to its big-box peers. Instead, investors should simply hold the stock, collect their dividends, and wait for the consumer tech sector to recover. I also believe patient investors should consider buying the stock at these levels. The company is better run than many other brick-and-mortar retailers, its valuation is attractive, and it could recover quickly once a new bull market finally emerges.