2023-05-26 12:11:46 ET
Summary
- Best Buy Co., Inc. reported a mixed FQ1 2024 quarter as sales trends continue to struggle.
- The electronics retailer appears to guide towards the comp sales trend heading towards flat for the holiday period in a positive sign of the business hitting bottom.
- The company now has 16% fewer outstanding shares.
- Best Buy stock only trades at 11x FY24 EPS targets, with plenty of upside to earnings as the business returns to growth.
After a tough year or so, Best Buy Co., Inc. ( BBY ) is finally ready to scrape back off the bottom. The electronics retailer has seen the benefits from the Covid pull forwards completely disappear. My investment thesis remains ultra-bullish on the stock for a rebound in profits, with Best Buy trading at a bottom basement valuation now.
Source: Finviz
Tough Period Ending
Best Buy just reported a quarter where sales fell 11.1% and comp sales declined by 10.1%. By all means, the electronics retailer reported a bad quarter.
The good news is that Best Buy still reported an EPS of $1.15 and beat estimates by $0.05 in a traditionally weak quarter. The company guided to some improving gross margins going forward.
Investors need to understand the round-trip Best Buy has taken in the last few years. The company reported FQ1'24 revenues of $9.5 billion and the amount sat at $9.1 billion in FQ1'20 (April '19) prior to Covid. April quarterly sales jumped to a peak of $11.6 billion in FQ1'22.
In essence, Best Buy saw April quarterly sales explode by $2.0 billion, and now those sales have dissipated. In fact, the guidance for FQ2 suggests revenue will dip below pre-covid levels.
For this reason, our view is that Best Buy is building a base here to rebuild the business on a return to normal growth trends. The stock regularly traded around the $70 level back in 2019 and actually rallied to the $90s right before Covid hit.
Following a solid quarter, management guided to a FY24 EPS in the $6.20 range. These numbers should set the new baseline for the business going forward.
A prime example of the extreme sales weakness ending is the guidance for full-year comps only declining 3.0% to 6.0% for the year. Best Buy reported FQ1 comps dipped 10.1% and the guidance is only for FQ2 to even worsen. The only method for reaching comp sales only dipping 3.0% for the year is the business coming very close to flat comps for the crucial holiday sales.
Best Buy has already reported 2 holiday periods with declining sales. Remember, FQ4'23 sales were already below the pre-covid levels at $14.7 billion versus the $15.2 billion in FQ4'20 for the January quarter reported just as Covid hit the U.S.
Ignored Benefits
While the last couple of years have been painful for shareholders with the stock peaking above $135 in late 2021 and now trading at only $71, investors now own a stock with vastly lower outstanding share counts. The Covid period provided excess profits the company utilized to reduce shares outstanding.
Best Buy ended FY20 with a diluted share count of 262 million shares. The company just reported a quarter with a share count of 220 million, with the amount dipping over 8 million shares in the last year.
The electronics retailer already pays a strong dividend with a yield of 5.3% now due to the weak stock price. The company repurchasing shares is just a huge bonus here, though the stock trades like Best Buy doesn't have much of a future.
The BoD has reduced the share count by 16% during this period. A company that repeats the FY20 numbers with the same income would see the $5.75 EPS boosted to $6.67.
The company only bought $79 million worth of stock in the last quarter, but Best Buy returned a combined $281 million to shareholders when including the dividend payment. Remember, the company made excess profits during Covid, but Best Buy is still set to earn over $6 per share in a period where comp sales collapsed.
Takeaway
The key investor takeaway is that Best Buy is now bottoming around where the business ended in FY20 prior to Covid. The company now has a substantially lower share count to provide a big boost to EPS going forward, and any growth beyond the FY20 levels will offer a large reward to shareholders.
Best Buy Co., Inc. stock only trades at 11x FY24 EPS targets while offering investors a dividend yield topping 5%. Investors should use this weakness to buy the upside opportunity in the solid electronics business.
For further details see:
Best Buy: Bouncing Off The Bottom