Best Buy earnings beat estimates, but it wasn't a great quarter

Brian Sozzi

A game of Wall Street expectations management 101 by Best Buy on Tuesday.

Shares of the consumer electronics retailer rose 6% in the trading session as second quarter earnings handily beat consensus estimates.

Considering Best Buy's cautious tone on the business back in its May earnings release, and the negative reads on big-ticket consumer spending since, the analyst community wasn't expecting much from the company's results.

Hence, sales and earnings beats.

But dig beneath the surface, and you will see a retailer still struggling with the new consumer environment of higher interest rates and pesky inflation. People opting to spend on services such as vacations are also not helping the cause of a discretionary goods retailer like Best Buy.

The company said Tuesday it saw sizable sales declines in key departments such as mobile phones, consumer electronics, and appliances. While it called out an improvement in the low end of its full-year EPS guidance versus that several months back, it still trimmed the top end — a nod to possible holiday spending softness.

Moreover, its third quarter sales guidance suggests the back-to-school electronics shopping season has started on a slow note.

"Consumers remain very deal focused,” Best Buy CEO Corie Barry told analysts on an earnings call, adding shoppers are more keen on spending on travel at the moment.

The earnings rundown

  • Net Sales: -7.2% year over year to $9.58 billion vs. estimates for $9.53 billion

    • Same-Store Sales: -6.2% vs. estimates for -6.4%

    • Domestic Same-Store Sales: -7.1%

    • International Same-Store Sales: -5.4%

  • Gross Profit Margin: 27% vs. 21.5% a year ago and estimates for 22.61%

  • Diluted EPS: -21% year over year to $1.22 vs. estimates for $1.07

What else caught our attention

  • Q2 domestic segment gross profit margins rose to 23.1% from 22% last year.

  • Q2 international segment operating profit margins fell to 2.7% from 3.7% a year ago.

  • Q2 overall operating margins were unchanged year on year at 3.6%.

  • Q2 inventory fell 6.5% from a year ago, slower than the pace of sales.

  • Q2 same-store sales declines in the domestic segment: computing and mobile phones -6.4%; consumer electronics -5.7%; appliances -16%.

  • Q2 same-store sales increases in the domestic segment: entertainment up 9%; services up 7.6%; other up 2.4%.

  • Q2 same-store sales fell in all segments for the international segment, except for a 2.5% increase in entertainment and a 4.6% gain in services.

  • Q3 same-store sales seen as "slightly better" than the 6.2% drop in the second quarter.

    • August same-store sales tracking down 6%, per BBY's CFO on earnings call.

  • Q4 (holiday quarter) same-store sales seen -3% to slightly positive.

  • 2023 EPS guidance: $6.00 to $6.40 vs. estimates for $6.06 (prior: $5.70 to $6.50)

What competitors said: Q2 general merchandise sales

  • Walmart US same-store sales of general merchandise fell by a low-single digit percentage due to weakness in home goods and apparel.

  • Sam's Club US same-store sales of tech merchandise declined by a low-double digit percentage due to softness in consumer electronics.

  • "After years of stimulus-fueled purchasing, the discretionary dollar is harder for our members to part with, and buying habits are returning toward normal. This has affected sizable general merchandise categories, such as consumer electronics, along with more seasonal categories like patio and outdoor furniture." -BJ's Wholesale CEO Bob Eddy

What Wall Street is saying post earnings

  • "BBY put up mixed results — (i) 2Q EPS beat led by slightly better than expected SSS and strong GM performance, (ii) full year SSS was lowered with 3Q SSS set below the Street, and (iii) full year EBIT margin/EPS were raised to the high-end of the prior range reflecting 1H margin strength. In our view, the print was largely in-line with market expectations. BBY is executing well on what’s under their control, but the backdrop remains challenging from a demand perspective. We remain concerned the recovery in consumer electronics spending will take longer than BBY’s base case and be choppy, limiting the potential snapback in EBIT margin rate and earnings power. The new concern of credit losses weighing on profitability should be an overhang for BBY shares since it was a material tailwind to EBIT margin rate the past several years. Stay Sell-rated with a $70 target price." -Citi analyst Steven Zaccone

  • "We walk away encouraged to hear a few categories posted flat y/y unit growth in 2Q, though timing of the forthcoming CE cycle remains difficult to pin down. With '24 poised to see replacements stemming from the first wave of COVID demand, deferral from '23, and recent product innovation, transactions could be positive. Combined with LSD% pricing from innovations, +LSD% comp growth driving slight EBIT% expansion remains our base case. Maintain Hold." -Jefferies analyst Jonathan Matuszewski

Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.

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