Best Buy (BBY -0.81%) is still suffering from a painful growth hangover following surging demand through the worst of the pandemic. The retailer's late May sales update met management's conservative targets, but Wall Street wasn't excited to see a double-digit revenue slump as shoppers tilted spending away from consumer electronics.
There's nothing unusual about cyclical downturns in this industry, and they don't threaten the long-term investing picture. So let's look at whether Best Buy stock is a bargain right now.
Meeting low expectations
The company announced on May 25 that comparable-store sales fell 10% in the selling period that ended in late April. This slump was right in line with management's March forecast that predicted a tough year ahead for the company due to factors like weakening consumer confidence and inflation.
Best Buy isn't alone in dealing with these challenges, either. Large U.S. national retailers, including Target and Home Depot, have noted in recent weeks that shoppers are pulling back on consumer discretionary purchases, Best Buy's main niche. "Customers are clearly feeling cautious and making trade-off decisions," CEO Corie Barry said in a press release.
Balancing priorities
Best Buy's strategy during a downturn like this is to protect profitability in the short term while still investing in long-term growth initiatives. The company is performing well on these points. Yes, operating profit margin shrank compared to a year ago, dropping to 3% of sales from 4%. But the retailer is still profitable, and margins are comparable to Target's and Walmart's today.
BBY Operating Margin (TTM) data by YCharts
At the same time, the company is making investments in boosting customer satisfaction in areas like home delivery, setup, and technical support. Those services help differentiate the retailer from peers and from e-commerce specialists, and its rising satisfaction levels lay the groundwork for faster growth once the industry starts rebounding.
Looking ahead
There's no indication that such a rebound is imminent, though. Best Buy simply affirmed its somewhat bleak fiscal year outlook that calls for comp declines of between 3% and 6%, and a weaker-but-still-positive profit margin. There's a chance that actual results will outperform this conservative outlook. Yet investors are more worried about the potential for a deeper downturn ahead as the recession risk rises.
That wide range of possibilities is a big reason why the stock has become cheaper lately. Shares are valued at close to a 10-year low, in fact, or roughly 0.3 times annual sales. Target and Walmart are priced at roughly double that valuation, suggesting a huge discount for investors looking to add Best Buy to their portfolios today.
The main difference between Best Buy and these other retailers, though, is that its sales footprint is more focused on consumer discretionary products. It doesn't sell a large amount of staples that could protect revenue and earnings trends through a recession, which exposes investors to more risk. It could be at least another year, for example, before profitability begins to march back toward the over 7% rate that Best Buy achieved during the pandemic's height.
As a result, investors might want to keep this stock on their watchlists, but not in their portfolios right now. Watch for signs of stability in the consumer electronics industry before jumping into Best Buy stock.
