Is Best Buy (BBY) Flashing a Red Alert for Investors?

Best Buy Co., Inc. (BBY), the electronic retailing giant, reported better-than-expected fourth-quarter 2024 earnings and revenue. The recent report broke a string of eight straight year-over-year EPS declines. The retailer posted an EPS of $2.72 in the quarter that ended January 28, 2024, up 4% from the prior year’s quarter. That exceeded analysts’ earnings estimate of $2.50 per share.

Although BBY experienced stagnant revenue in the fourth quarter of 2024, dropping by less than 1% to $14.65 billion, it surpassed analysts’ expectations of $14.56 billion. 

However, for the full year 2024, the company recorded $43.45 billion in revenue, marking a 6.1% year-over-year decrease. Moreover, its operating income experienced a 12.3% year-over-year decline to $1.57 billion, while net earnings dropped by 12.5% to $1.24 billion from the previous year’s $1.42 billion.

This scenario likely stems from Americans contending with elevated prices for essentials such as rent and specific foods despite an overall decrease in the inflation rate. In the meantime, acquiring loans for appliances, cars, and homes or utilizing credit cards remains accompanied by higher costs.

Persistent challenges in the housing market have prompted consumers to scale back their purchases of high-value items. Additionally, there’s a sustained preference for experiential spending on activities such as concerts and travel. Consequently, consumers are exercising caution when it comes to expenditures on gadgets and other products.

The current scenario presents a stark contrast to BBY’s sales during the peak of the pandemic, characterized by heightened consumer spending on electronics. Shoppers indulged in purchases to facilitate remote work and assist with virtual learning for their children. Additionally, government stimulus checks played a significant role in driving this spending spree.

Furthermore, Neil Saunders, managing director of GlobalData, said, “Over the final quarter, the market was soft, but Best Buy underperformed it and lost share.”

Particularly evident was this trend in appliances, where competitors such as The Home Depot, Inc. (HD) fared significantly better, and in consumer electronics and computing, where companies such as Apple Inc. (AAPL) and, Inc. (AMZN) demonstrated superior performance.

Also, BBY incurred $169 million in fourth-quarter restructuring charges linked to employee layoffs. Looking forward, BBY anticipates approximately $10 million to $30 million in additional restructuring-related charges for fiscal year 2025.

This restructuring is intended to “right-size resources to better align with the company’s revenue outlook for FY25,” among other goals. 

Concurrently, Best Buy’s CFO Matt Bilunas stated that, as part of their ongoing strategy, they would persist in closing traditional stores as they conduct thorough evaluations upon lease renewals. “In fiscal '24, we closed 24 stores,” he noted. “And in fiscal '25, we expect to close 10 to 15 stores.”

So, amid flat revenue in the fourth quarter, the retailer is braced for layoffs and store closures. Despite this, BBY’s stock approaches the Buy point on its earnings surprise. Shares of BBY have gained nearly 6% over the past month.

Meanwhile, analysts responded to the electronic retailer giant’s better-than-anticipated earnings by increasing their share price targets. Truist analyst Scott Ciccarelli raised the firm’s price target on BBY to $87 from $68.

Also, Telsey Advisory Group analyst Joseph Feldman increased his price target for Best Buy to $85 per share from $75 while maintaining a Market Perform rating on the stock. Feldman said Best Buy’s EPS exceeded the firm’s estimates, driven by better-than-expected sales and profitability.

However, fourth-quarter comparable sales were still bleak given a challenging industry and macro environment, he added. Overall, Feldman stated, Best Buy has a sound business strategy and solid management team while being ahead of its peers in its omnichannel capabilities, usage of real estate, and new revenue streams.

Furthermore, Jefferies increased the firm’s price target on BBY from $89 to $95 while maintaining a Buy rating on the shares after it called “slightly better” fourth-quarter results.

Bottom Line

Maintaining such extensive inventory can incur significant costs, particularly considering BBY’s operation of more than 1,000 stores solely in the United States. The array of expensive electronic products, often swiftly rendered obsolete by the rapid pace of technological advancement, pose liabilities until sold and ensuring consistent merchandise turnover can pose challenges.

Hence, the retailer shuttered 24 stores last year and intends to continue closing underperforming ones. The company is also strategically removing certain items from shelves at remaining stores, redirecting focus towards higher-margin products. The retailer plans to discontinue sales of DVDs and other physical media products to revamp its tech centers and allocate space for more lucrative tech items.

Corie Sue Barry, BBY’s CEO & Director, clarified, “We’re not remodeling every store in the fleet, but we’re enhancing the shopping experience to embody the excitement and innovation that technology offers.”

She emphasized the removal of outdated technology that no longer significantly contributes to its bottom line.  “And so, removing physical media, updating mobile, digital imaging, computing, tablets, and smart home, I think that allows us to make that center of the store really feel a bit more vibrant and exciting. And so, the goal here is not that every single store is going to look like an Experience Store.”

This entails embracing agility in previously unexplored markets and creating space for reimagined store concepts. BBY is reassessing its large store formats, which have functioned more as display-centric warehouses than profit-driven entities.

The company also plans to launch additional outlet centers and novel formats to test two key concepts. Firstly, small locations will be opened in selected outstate markets lacking prior physical presence, gauging the potential to capture untapped market share.

Secondly, Best Buy will explore transitioning from large-format to small-format stores nearby, aiming to enhance convenience and retain physical store presence effectively. Also, the retailer is increasingly investing in AI to improve operational efficiency and customer service.

BBY expects sales in the computing category to strengthen, demonstrating growth for the full year 2025. This projection is based on the increasing momentum of early replacement and upgrade cycles, alongside the release of new products featuring advanced AI capabilities throughout the year.

Wedbush analyst Basham has echoed similar sentiments, noting, “There are building signs of stabilization in consumer electronics, with laptop and TV unit sales again increasing for [Best Buy] in 4Q24, and replacement and innovation cycles likely to build from here.”

Also, the implementation of workforce reductions and cost-saving measures within the company aims to free up capital for reinvestment, particularly in emerging areas like artificial intelligence. This strategy is designed to position the company strategically for an anticipated industry rebound.

Additionally, in January 2024, the retailer announced its collaboration with Bell Canada to run 165 small-format electronics stores. These BBY Express outlets will provide consumer electronics alongside phone, internet, and TV services. The launch of these express locations is anticipated in the second half of this year.

The company anticipates growth opportunities in healthcare as well. Although still a small segment compared to its core business, BBY’s Health sales are projected to grow faster than the core business by fiscal 2025. This growth, coupled with cost synergies from integrating acquired companies, is forecasted to drive a 10-basis points expansion in enterprise operating income rate.

BBY anticipates sales for the current year 2025 to range between $41.30 billion and $42.60 billion, while analysts are projecting $42.09 billion. Moreover, the company’s earnings per share for the year are expected to range from $5.75 to $6.20, compared to analysts’ expectations of $6.06.

Therefore, considering BBY’s strategic adjustments, such as optimizing store layouts, exiting low-margin product lines, and venturing into promising sectors like healthcare, it’s advisable to hold onto its shares. Positive industry sentiments, anticipated sales growth, and innovative collaborations indicate potential for future profitability and shareholder value.