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.

4 Stocks to Buy Before Black Friday 2023

Black Friday, a renowned shopping holiday, is rapidly gaining popularity worldwide. The fervor surfaces like clockwork every year. The event signals the onset of the festive retail period, where vendors entice consumers with considerable discounts and appealing deals on merchandise.

Consumers’ scramble for long-desired products is typically the culmination of months of intense preparation undertaken by retailers, warehouse supervisors, and distribution center managers.

Financial analysts conventionally consider the sales returns on Black Friday to outline prevailing consumer confidence. For retail entities, Black Friday has consistently offered an immense financial uplift. Many consumers leverage the occasion to fulfill their Christmas shopping needs at competitive prices.

With persistent escalations in living costs pressurizing household budgets, 74% of consumers intend to exploit the November sales extravaganza in 2023. The National Retail Federation forecasts that holiday spending will increase annually by 3% to 4%. This year's total festive spending is anticipated to range between $957.3 billion and $966.6 billion.

Black Friday is transitioning from physical store-bound activity to being predominantly digital. In 2022, 69% of Black Friday shopping occurred online, as consumers splurged a record-breaking $9.2 billion, according to data from Adobe Analytics. Furthermore, logistical operations for this retail marathon require meticulous strategizing by retail managers, leading to millions in annual outlay.

As digital transactions encroach on the week-long event, it carries notable implications for delivery logistics. Notably, while retailers profit from the holiday season, package delivery services also stand to reap considerable benefits.

Considering this backdrop, it is pertinent to examine why United Parcel Service, Inc. (UPS), FedEx Corporation (FDX), eBay Inc. (EBAY), and Best Buy Co., Inc. (BBY) could be solid investments this festive season.

United Parcel Service, Inc. (UPS)

With a market cap of over $121 billion, UPS is a logistics behemoth that offers various integrated solutions for customers scattered across more than 200 locations worldwide.

Despite its significant standing, the company has been grappling with an assortment of challenges throughout this year. These range from a weakening demand due to economic slowdown to expensive, drawn-out labor contract negotiations, all translating into a forecasted decline in the company’s revenue and earnings for the current fiscal year.

The protracted labor talks significantly distorted UPS' earnings during the year. The resulting five-year contract led to a whopping $500 million upfront expenses in the third quarter alone. At the same time, the extended negotiations caused many customers to switch their deliveries to other networks.

However, opportunities abound as the Black Friday holiday season approaches for UPS to turn the tide. This retail extravaganza provides ample scope for UPS to augment its revenue, attract fresh clientele, and retain its existing customer base, courtesy of its high-quality service offerings.

UPS is improving the underlying quality of its business. This is most easily seen in two areas relating to its revenue. The first is the conscious decision to be more selective over deliveries rather than chasing volume growth. Second is that UPS has made great strides in expanding its connections with small and medium-sized businesses (SMB) and healthcare customers, and it's been able to significantly grow its revenue per piece in recent years.

Moreover, the company's noteworthy 4.7% dividend yield appeals to a broad swathe of income-oriented investors, and value investors also find favor given its appealing valuation metrics. The firm's below-industry non-GAAP P/E ratio presents a lucrative buying opportunity for investors.

Over the past year, the stock has lost roughly 20% and trails behind the 50, 100, and 200-day moving averages. However, Wall Street analysts forecast the stock to reach $168.30 in the next 12 months, indicating a potential upside of 17.6%. The price target ranges from a low of $100 to a high of $202.

FedEx Corporation (FDX)

The shipping and logistics company FDX, with a market cap of over $63 billion, is poised to reap significant benefits from the upcoming Black Friday sales. In anticipation of heightened online shopping activity during this period, increased demand for shipping services allows the company to expand its customer reach and deepen its market penetration.

Its potential to attract consumers by offering holiday promotional discounts on its services could significantly drive its revenue growth and expand its market share. The company's decision to partner with retailers for shipping services further bolsters the potential for enhanced revenues during this season of heightened consumer spending.

Additional services provided by FDX, including gift wrapping, package tracking and insurance, could further distinguish it in a competitive marketplace, attracting additional consumers during the holiday season.

Furthermore, FDX's effective cost-reduction strategies have successfully strengthened its financial standing. Outperforming Wall Street predictions, the international courier company reported impressive fiscal first-quarter adjusted earnings of $4.55 per share.

This robust financial performance led the company's management to elevate its future financial outlook. FDX shares gained momentum after the Memphis-based firm announced adjusted earnings expectations for fiscal 2024, projecting $17 to $18.50 per share.

The company also expects capital expenditure to reach $5.7 billion, with investment priorities geared towards improving efficiency through fleet and facility modernization, network optimization, and automation strategies.

Driven to implement transformative initiatives enhancing efficiency and reducing expenses, FDX anticipates building upon current momentum to improve profit margins and returns throughout the fiscal year. The stage is set for another year of exceptional profitability for FDX, with shares currently trading at a reasonable valuation.

Over the past year, the stock has gained roughly 45% and trades above the 200-day moving average of $237.12. However, Wall Street analysts forecast the stock to reach $297.85 in the next 12 months, indicating a potential upside of 17.2%. The price target ranges from a low of $265 to a high of $330.

eBay Inc. (EBAY)

With over $20 billion in market cap, EBAY, an established e-commerce heavyweight, is tirelessly striving to attract its consumers' interest and spending power. The company initiated the publication of its discount coupons on November 6.

Customers seeking automotive necessities, smartwatches, and Apple products can reap the benefits of up to 75% discount by commencing their shopping endeavors with EBAY this holiday season.

The company recently expanded access to its Generative AI technology, an innovative system designed to upgrade the listing experience for sellers, which is now available to mobile users in the United States, the United Kingdom, and Germany, and 50% of desktop users in these regions.

However, EBAY's recent sales forecast for the upcoming holiday period has somewhat dispirited investors. Expected revenues for the current quarter are anticipated to total between $2.47 billion and $2.53 billion, which, while robust, fall below the industry analysts' average projections of $2.60 billion.

Its bleak revenue predictions for the historically lucrative holiday quarter indicate continued difficulties in retaining customers amid fierce competition from larger competitors. Despite U.S. online sales being projected to increase by 4.8% during the holiday season spanning November 1 to December 31, EBAY faces an uphill battle to attract traffic. To weather these challenges, the company plans to enhance its cost efficiencies to safeguard profit margins and earnings.

The unexpected forecast emanated shockwaves throughout the financial sector, particularly unsettling EBAY investors. Post-announcement, the company's shares suffered a significant plunge, underscoring the heavy expectations investors attach to EBAY due to its commanding position in the e-commerce market.

Over the past year, the stock has lost over 12% and trades below its 50-, 100-, and 200-day moving averages. However, Wall Street analysts forecast the stock to reach $44.75 in the next 12 months, indicating a potential upside of 11.6%. The price target ranges from a low of $32 to a high of $56.

EBAY constantly refines its strategies to uphold its preeminence in an industry characterized by relentless evolution and revolution. As the holiday season looms, its performance is under intense scrutiny as never before, making its sales forecast a widely watched indicator in the e-commerce landscape.

Best Buy Co., Inc. (BBY)

BBY, with over $14 billion market cap, is a specialty consumer electronics retailer that introduces various promotional events via its recently inaugurated Holiday Gift Center – offering unique exploration and immersive discovery experiences of cutting-edge technologies for its clientele. BBY members can anticipate exclusive savings throughout the holiday period. The company will depend on its My Best Buy membership benefits to boost this year's holiday sales.

Interestingly, BBY finds itself in a unique situation this festive season as it battles to maintain market share during a time frame it typically dominates. The retailer has tempered expectations for a highly successful holiday season, which usually accounts for a significant proportion of its profit margins.

While BBY has a low non-GAAP P/E of 10.30x, its dividend yield of 5.74% remains low for various reasons. As of July 29, 2023, BBY has $8.43 billion in current liabilities and $8.30 billion in current assets. Of its current assets, $5.65 billion in merchandise inventories highly depends on consumer spending patterns.

The company’s vulnerability can be illustrated further by its lower than 1x current ratio. Given the upcoming debt maturity, the company’s fortunes largely hang on the successful sale of inventory to maintain its dividend.

This year’s holiday season provides a moment for BBY's modern retail business model – which largely thrived during the pandemic – to prove its resilience. The Richfield, Minnesota-based firm continues to concentrate on enhancing its digital capabilities, such as augmenting its omnichannel services. Its consultation service, supporting customers' personalized tech requirements, has grown in popularity.

In the second quarter that ended July 29, 2023, digital sales comprised 31% of our domestic revenue, consistent with the year-ago quarter and nearly twice as high as the domestic revenue percentage in the pre-pandemic second quarter of fiscal 2020.

Although the BBY stock has declined over 10% over the past year and is trading beneath the 100-day and 200-day moving averages, Wall Street analysts remain optimistic. They forecast the stock to reach $78.60 in the next 12 months, indicating a potential upside of 18.2%. The price target ranges from a low of $60 to a high of $110.

Even though it is perceived as a risky stock with slim margins and limited appeal to investors, BBY is determined to convince potential investors that its forward-looking strategies, industry reshaping efforts, and focus on advancing in-store experiences and robust pickup/delivery operations mark it as a worthwhile investment prospect. Hence, it could be best added to the watchlist.