Is Best Buy Stock a Buy?


best buy (ABY -0.99%) has been one of the most resilient physical retailers throughout the pandemic. Its sales of PCs and other consumer electronics soared as more people worked from home, while its timely investments in e-commerce supported its accelerating digital sales.

But as the shutdowns ended and more people returned to work, Best Buy’s growth stalled. After closing at a record high of $134.11 per share last November, its share price has fallen back to lows of $70.

Image source: Best Buy.

That drop was painful, but it also reduced Best Buy’s forward price-earnings ratio to 12 and increased its forward dividend yield to 4.5%. By comparing, Target (TGT -0.15%) – which faces similar headwinds – is trading at 17 times forward earnings and paying a forward yield of 2.6%. So should investors consider Best Buy an undervalued dividend stock again?

Robust growth before and during the pandemic

Best Buy had already generated steady growth before the pandemic, thanks to former CEO Hubert Joly’s “Renew Blue” turnaround efforts from 2012 to 2019. Under Joly, Best Buy streamlined its inventory systems, expanded its e-commerce, revamped its employee training and leased its floor space to major brands to attract more physical shoppers.

Joly’s successor, Corie Barry, maintained those priorities. In fiscal 2020, which ended February this calendar year, Best Buy’s revenue increased 2% to $43.6 billion as its same-store sales (total) increased. by 2.1% and its national online compositions by 17%. Its adjusted operating margin rose 30 basis points to 4.9%, while its adjusted earnings per share (EPS) climbed 14%.

Its revenue grew another 8% to $47.3 billion in fiscal 2021, as its business comps grew 9.7% and its domestic online comps jumped by 144%. Its adjusted operating margin rose again to 5.8%, as its adjusted EPS jumped 30%. He attributed most of that growth to the high demand for computers, home appliances and other products throughout the pandemic.

That momentum continued in fiscal 2022, with its revenue growing 10% to $51.8 billion. Its business comps were up 10.4%, but its domestic online comps were down 12% from its feverish growth at the height of the pandemic. Its adjusted operating margin increased to 6%, while its adjusted EPS increased by 27%.

But it now faces a tough post-pandemic downturn

At the end of fiscal 2022 (January 29, 2022), Best Buy told investors to prepare for a downturn in fiscal 2023 as its pandemic and stimulus measures faded. But throughout the first two quarters of fiscal 2023, it repeatedly cut that forecast as it faced tougher inflationary and supply chain challenges:


Q4 2022

Q1 2023

Q2 2023

Revenue Growth Forecast (Fiscal 2023)



N / A*

Company Compensation Growth Forecast (Fiscal Year 2023)




Adjusted operating margin forecast (fiscal year 2023)




Adjusted EPS growth forecast (FY2023)



N / A*

Data source: Best Buy. *Outdated. FY = Fiscal year.

As a result, analysts now expect Best Buy’s revenue and adjusted EPS to decline 10% and 37%, respectively, in fiscal 2023. As it outpaces the pandemic and lockdowns stimulus, inflationary headwinds will likely further limit its sales of more expensive items like consumer electronics and appliances.

In his latest conference call, Corie Barry said Best Buy currently faces a “highly volatile macroeconomic environment” in which “very unequal” consumers are prioritizing their purchases based on “how long inflation lasts.” Markdowns and higher transportation costs will also squeeze its margins in the short term.

Going back on its 2025 objectives

Three years ago, Best Buy predicted it would generate $50 billion in revenue by fiscal year 2025, with an adjusted operating margin of 5%. It actually surpassed $50 billion in revenue in fiscal 2022, but analysts expect it to drop back below that threshold in fiscal 2023 and 2024.

That’s why it wasn’t surprising that Best Buy dropped those expectations in the second quarter. During the conference call, Barry said the company would revise those expectations once it begins to “experience a more stable operating environment.”

His stock could get stuck in the mud

Best Buy’s inventory levels were actually down 6% year-over-year in the second quarter, so it’s not drowning in excess inventory like Target and other big-box retailers. It is also solidly profitable and is offsetting some of the short-term pressure on its gross margins by generating higher-margin revenue through its private label and co-branded credit cards.

Analysts expect its adjusted EPS to fall to $6.28 per share, but that should still easily cover its projected annual dividend of $3.52 per share. It also suspended its buybacks during the second quarter to conserve additional cash, and it began to restructure its business to cut costs as its growth slows.

All of this suggests that Best Buy is simply facing a cyclical downturn instead of an existential crisis. However, his stock may remain stuck in the mud for the foreseeable future until his growth stabilizes again. Its low valuation and high yield will likely limit its downside potential, but I’d rather stick with more promising stocks than wait for Best Buy’s eventual reversal.


About Author

Comments are closed.