The Street Debates Whether Best Buy Investors Should Buy The Dip

Electronics retailer Best Buy Co., Inc. BBY reported Thursday first quarter results, highlighted by a 5.7% year-over-year drop in comps which was still better than expected. EPS also came in better than expected but the stock traded lower as investors debated its outlook in an uncertain retail environment.

The Best Buy Analysts

Morgan Stanley analyst Simeon Gutman maintains an Equal-weight rating on Best Buy's stock with a price target lifted from $75 to $85.

Oppenheimer analyst Brian Nagel maintains at Outperform, unchanged $105 price target.

KeyBanc Capital Markets Bradley Thomas maintains at Sector Weight, no price target.

BofA Securities analyst Curtis Nagle maintains at Neutral, unchanged $80 price target.

Raymond James analyst Matthew McClintock maintains at Strong Buy, unchanged $100 price target.

7 Takeaways On Best Buy's Q1

Best Buy's first quarter earnings report is highlighted by seven key takeaways, Morgan Stanley's Gutman said in a note. They are: 

1. Comps of 5.7% missed a flat-to-negative, low single-digit figure investors expected, but stimulus measures helped lift sales late in the quarter.

2. Sales were impacted by a greater-than-expected impact from store closures, while some rivals kept all of their stores open throughout the quarter.

3. Despite potential share loss in the quarter, Best Buy has a "realistic path" to growing market share, especially from smaller regional and independent rivals.

4. Online sales were up 155% in the quarter versus an average of 16% growth over the past three years. Management deserves credit for showcasing "the sophistication" of its investments in a multichannel business.

5. Gross margins were down 70 basis points in the quarter and margin headwinds should continue throughout 2020, mostly due to unusually high online sales.

6. SG&A declined by roughly $100 million from last year, as the company may be relatively insulated versus other retailers.

7. The company faces "a few tougher quarters" in 2020, although its outlook for 2021 is unchanged.

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Checking In With Best Buy Management

Oppenheimer analysts spoke with Best Buy's senior management to discuss its earnings report and underlying trends, Nagel wrote in a note.

The five highlights include:

1. Best Buy's digital platform and omnichannel capabilities are "responding well" to a shift toward online sales.

2. Physical stores remain an important part of the business, as 65% of all sales are shipped or picked up from a physical store.

3. The company is exploring ways of installing and repairing items in homes.

4. In-store services will remain a key component of the business with health precautions.

5. Sales of TVs and large appliances saw an uptick as customers got used to the new curbside business model.

Best Buy's COVID-19 Update

Best Buy pivoted its stores in late March toward an enhanced curbside-service only model and paused all in-home delivery options, KeyBanc's Thomas wrote in a note. Encouragingly, the company highlighted very strong demand for in-home installations and repairs in the face of social distancing worries.

The company did furlough around 51,000 domestic hourly store workers and close to all part-time workers in April. But Best Buy still managed to retain 82% of full-time store and field employees.

In late April, Best Buy resumed large product delivery and in-home installations and repairs for new orders and started to open its doors to clients in new May through a new appointment system.

"Looking ahead, management is evaluating additional changes, including expanding store hours and opening some stores beyond the current appointment-only model," the analyst wrote.

Debate On Best Buy's Near-Term Outlook 

What's next for Best Buy in an uncertain retail environment is up for debate.

On one hand, a potentially "very weak" macro environment makes the case for investors to hold a cautious stance due to a "give back in demand," BofA's Nagle said in a note.

Management didn't issue any full-year guidance, but said it saw strong sales retention trends so far in the second quarter.

Best Buy hasn't signaled when it expects all stores to reopen and may extend store hours or open some locations beyond the appointment-only model at 700 locations, the analyst said. Given a strong sales retention trend so far in the quarter, "this measured approach makes sense."

On the other hand, Raymond James analyst McClintock said Best Buy's outlook remains favorable, as it has sufficient liquidity to outlast any economic uncertainty while still making investments on capturing future market share growth. 

At a time when others are holding a cautious stance, Raymond James is doing the opposite. The research firm is lifting its fiscal 2021 EPS outlook from $4.85 to $5.30 due to an improved comp sales outlook and "somewhat more optimism" on the COVID-19 recovery path.

BBY Price Action

Best Buy shares were down 1.66% at $76.92 at the close Friday.

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