This year we have already published two articles on Best Buy (NYSE: BBY), entitled :
both times we’ve rated Best Buy’s stock as “pending”. The main reasons for our assessment were:
+ According to traditional price multiples, BBY appears undervalued.
+ The company has a strong track record of returning value to its shareholders through dividend payments and share buybacks.
– Macro headwinds are expected to put downward pressure on sales and margins in the near term.
– Best Buy’s enterprise same-store sales declined.
In today’s article, we’ll take a look back at Best Buy and provide an updated view on the title, taking into account recent macro and microeconomic developments.
Let’s start with the company’s latest quarterly earnings report.
Quarterly Revenue Report
Just like in the first quarter, in the second quarter, the comparable sales figures continued to decline.
Sales trended lower across all segments, along with shrinking margins. If these results do not particularly delight shareholders, they are not a surprise. We highlighted in our previous article that low levels of consumer confidence are likely to lead to lower demand for non-essential durable goods. This trend is now clearly visible in the company’s results. In the press release, management also explained the lower than expected demand, compared to previous years:
Our comparable sales decreased 12.1% as we outpaced strong comparable sales growth of 19.6% last year. […] At the start of the year, we expected the consumer electronics industry to be weaker than last year after two years of strong growth driven by unusually strong demand for technology products and services and fueled in part by stimulus dollars. The macroeconomic environment was more difficult due to several factors, which put additional pressure on our industry.
On the other hand, the company kept its latest guidance (released in July) unchanged, which calls for a comparable sales decline in a range of around 11% and a non-GAAP operating profit rate of around 4%. %.
On a sectoral basis, more information was provided on the driving factors behind the decline in sales and the contraction in margins:
From a merchandising perspective, the company saw comparable sales declines in nearly every category, with the top drivers on a weighted basis being IT and home theater. The domestic gross margin rate was 22.0% compared to 23.7% last year. The decrease in the gross margin rate is mainly due to: (1) lower service margin rates, including the pressure associated with the Best Buy Totaltech membership offer; (2) lower product margin rates, including increased promotions; and (3) higher supply chain costs.
All the reasons mentioned here were partly anticipated in our first two articles.
International revenue of $760 million was down 9.3% from a year ago. This decrease is mainly attributable to a 4.2% decrease in comparable sales in Canada and the negative impact of approximately 420 basis points from foreign exchange rates. The international gross margin rate was 23.4% compared to 24.3% last year. The decline in the gross margin rate is mainly due to the decline in margin rates on products.
Not only Best Buy, but many companies operating internationally have experienced significant currency headwinds in recent quarters due to the historic strength of the dollar against other currencies. Due to rising interest rates in the United States, we expect this trend to continue in the near future and continue to negatively impact BBY’s financial performance overseas.
Return value to shareholders
Best Buy has demonstrated a strong commitment over the past 18 years to returning shareholder value in the form of dividend payments. On August 31, the company announced that the board had authorized a quarterly dividend of $0.88 per share, in line with the previous amount. This amount corresponds to a forward yield of approximately 4.7%.
On the other hand, the company suspended stock repurchases in the second quarter of FY23. Although we have previously stated that we like companies that repurchase their stock, we understand the reason for the current decision. In our view, in the current difficult macroeconomic environment, it is important for the company to adjust its capital allocation priorities to ensure that it has sufficient financial flexibility, in case the headwinds persist longer. longer than expected.
In our previous articles, we mentioned that we find BBY shares attractive from a valuation perspective.
Since then, the stock price has fallen about 5%, roughly in line with the decline in the broader market. Despite declining earnings, we believe that at these price levels, BBY’s stock remains attractive. Most valuation metrics show that the company is still trading at a discount to both its 5-year average and the Consumer Discretionary sector median.
Key points to remember
There has been no significant improvement in the macroeconomic environment. Low consumer confidence, declining demand, supply chain disruptions, high input and freight costs continue to negatively impact Best Buy’s financial performance. We believe these headwinds are temporary, but should last for the rest of the year, potentially through mid-2023.
Despite the relatively large drop in sales and shrinking margins, management did not change its previous guidance for the year, provided in July.
Although BBY has suspended its share buyback program for understandable reasons, they continue to pay quarterly dividends to their shareholders.
From a valuation perspective, in our view, BBY remains attractive.
For these reasons, we are maintaining our “hold” rating on the stock.