The performance of Best Buy (BBY) stock has been far from impressive in 2023. However, market watchers are anticipating a potential shift as the company prepares to release its earnings report on Tuesday.
Despite a positive market trend, Best Buy’s shares have declined by 7.7% since the beginning of the year. This underperformance is significantly worse than that of the SPDR S&P Retail exchange-traded fund (XRT), which has experienced a 2.8% gain, and the S&P 500, which has climbed by 15%. The reason behind this downward trend lies in the troubled state of Best Buy’s earnings estimates for 2023. Over the past six months, analysts have reduced their estimates for the retailer by approximately 12%, surpassing the consumer-discretionary sector’s 10% decline identified by FactSet. The challenging situation arises from an excess supply of electronics in the market due to a previous surge in demand during the Covid-19 pandemic. This oversupply has led to a decline in prices and sales volumes, ultimately putting pressure on profit margins and overall profitability.
Although there is no guarantee that the upcoming earnings season will revitalize Best Buy’s stock, there is hope that it could provide a much-needed boost. However, it is important to note that strong earnings reports have failed to significantly impact consumer stocks this quarter. According to Credit Suisse, companies in the sector have beaten estimates by an average of 22% as of August 18th, yet the retail ETF has witnessed a 9% decline since reaching its peak in late July. Furthermore, even companies that have surpassed expectations have provided cautious guidance due to ongoing consumer pressures, resulting in further share price drops. Examples of this include Macy’s (M), which experienced a 14% decrease after its recent report, and Dick’s Sporting Goods (DKS), with a significant 24% tumble on Tuesday.
In this uncertain climate, the market eagerly awaits Best Buy’s earnings report, which holds the potential to shift the trajectory of the company’s stock.
Best Buy: Strong Earnings Projected
Best Buy, a prominent retail company, seems poised to distinguish itself from the crowd. Despite a slight decline in earnings, estimates indicate that sales for the second quarter will reach $9.52 billion, surpassing the first quarter’s $9.45 billion. According to Seth Basham, an analyst at Wedbush, these numbers are beatable. He confidently asserts, “We lean positive on Best Buy into second-quarter 2023 earnings.” Anticipating a potential upside to sales and margins, Basham suggests that Best Buy may even raise its fiscal-year 2023 guidance, despite uncertain market conditions.
It is worth noting that exceeding expectations is not foreign to Best Buy. The company has outperformed forecasts in six out of the last seven quarters, as reported by FactSet. Moreover, it has consistently seen gains in share value after announcing earnings, achieving this in six of the seven aforementioned quarters. One factor contributing to this trend is the stock’s affordability. Currently trading at approximately 11.3 times 12-month forward estimates, it remains below its five-year average of 12.4 times. Additionally, it presents an attractive 39% discount compared to the S&P 500’s valuation of 18.6 times. Historically, it has even traded at a 20% discount when market confidence was high. As a result, there is potential for the stock to trade at 14 times, indicating a promising 24% increase from its most recent closing price.
If Best Buy’s earnings and guidance prove solid, it could emerge as one of the most favorable investment opportunities in the market over the next week.
