Best Buy's Growth Hinges On Computing And Services As Q3 Approaches: Analyst

BofA Securities analyst Robert F. Ohmes maintained an Underperform rating on Best Buy Co, Inc BBY with a price target of $80.

Ohmes maintains a cautious stance on Best Buy ahead of its fiscal third-quarter 2025 earnings report, scheduled for November 26. Ohmes projects revenue of $9.62 billion and earnings per share (EPS) of $1.26.

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Enterprise comparable sales are expected to decline by 1%, slightly improving from the 2.3% drop reported in the fiscal second quarter.

Computing products such as notebooks, tablets, and services are anticipated to offset softness in appliances and home theater segments. However, aggregated credit and debit card data from October suggests that value-conscious consumers may delay purchases in anticipation of holiday sales.

Ohmes foresees limited gross margin expansion in the second half of fiscal 2024 compared to the first half.

Factors contributing to this include a smaller benefit from services and membership offerings following program changes at the end of June, alongside elevated promotional activity in a volatile consumer environment.

Margins are expected to face reduced credit card profit-sharing pressure, which could weigh slightly more on third-quarter results than fourth-quarter.

For 2025, the analyst anticipates fewer opportunities for margin growth, diverging from trends observed over the past two years.

Best Buy’s selling, general, and administrative (SG&A) expenses are expected to grow year-over-year in the second half of 2024, reversing favorable conditions from the first half.

Increased marketing efforts and expanded store labor dedicated to appliances and home theater departments will drive SG&A growth. Earlier benefits, such as reduced employee expenses and vendor support, are unlikely to repeat in the latter half of the year.

Ohmes retains an Underperform rating on Best Buy, citing headwinds such as a challenging discretionary spending environment, ongoing promotional activity, and competitive pressure from omnichannel retailers like Walmart and Costco Wholesale. These factors may overshadow expected growth in computing and services and potential stabilization in the consumer electronics industry by late 2024.

The analyst’s 12-month price objective of $80 is based on 12x projected fiscal 2026 EPS, slightly above Best Buy’s long-term average multiple but below the hardline retail sector average of 16x. While discretionary spending pressures weigh on valuation, sustained demand for consumer electronics and services, driven by remote work and learning trends, provides some downside protection.

Price Action: BBY stock is up 3.62% at $89.65 at last check Friday.

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