Maybe brick-and-mortar retail in the U.S. isn’t quite dead after all. Best Buy Co Inc (NASDAQ:BBY) stock is up 13% in early morning trading after a big first-quarter earnings beat. At those levels, BBY stock is now up ~34% so far in 2017 and 87% over the past year.
Best Buy management, from CEO Hubert Joly on down, deserve a ton of credit for creating a nimbler, stronger company. Barely a year ago, Best Buy looked like another victim of Amazon.com, Inc. (NASDAQ:AMZN). Suddenly, after a solid fiscal 2017 and an even better Q1 FY18, Best Buy looks like a formidable competitor itself.
But as strong as the quarter was, it’s hard to see much more upside in BBY stock at the premarket price around $57. Best Buy has found a niche for itself in U.S. retail — but the BBY stock price now reflects that, and is starting to price in consistent, long-term growth.
Considering that the threat from Amazon remains intense, and given the cyclical nature of BBY stock, that might be a bit aggressive — even after a very impressive Q1.
Best Buy Posts A Strong Q1 Earnings Report
For Q1, Best Buy revenue grew 1% year-over-year to $8.528 billion, better than Street estimates for a modest decline. The number was better than the company’s own projections as well. After Q4, Best Buy guided for a 2%-3% decline in consolidated sales this quarter. Non-GAAP EPS was even more impressive relative to expectations. Best Buy earned 60 cents per share, up nearly 40% year-over-year. It had guided for 35 cents to 40 cents — a decline of as much as 18% year-over-year.
It was a hugely impressive quarter — though there are a few reasons for caution. While the quarter beat expectations, same-store sales growth of 1.4% in the U.S. business still is a bit light from a long-term standpoint. The comparison wasn’t particularly difficult, either: comps declined 0.1% the year before. Barely 1% growth over two years seems good in this retail environment. But over the long haul, those types of comps generally lead to declining earnings as cost increases outpace sales growth.
That said, Best Buy clearly is capturing some of those online sales for itself. Online comparable sales increased 22.5%, and grew over 50% over the past two years. That’s a huge number for Best Buy.
The biggest fear surrounding BBY stock was that it would be a victim of the “showroom effect.” Customers would visit Best Buy to see the merchandise — and then buy it for a cheaper price in Amazon or even eBay Inc (NASDAQ:EBAY). No doubt that still occurs — but the fact that Best Buy is keeping a good portion of those showroom sales in-house is a huge boost to the bull case for BBY stock.
Is BBY Stock Still Cheap?
Even at $58, Best Buy stock doesn’t look terribly expensive. The company raised full-year guidance, and now expects non-GAAP operating income to grow 1.5%-5.5%, after expecting a flat performance coming out of Q4. That growth, along with an aggressive $1 billion share buyback announced in February, should get FY18 EPS closer to $4.
A 14x-15x earnings multiple for BBY stock hardly seems that expensive, given that Best Buy still is growing profits and clearly executing well.
Still, that seems a touch expensive. Best Buy’s overall growth is better than feared, but it’s not necessarily explosive. First-quarter results benefited from the Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) Switch, as entertainment sales reversed from an 11%-plus decline last year to an 11% increase this year.
Strong growth in appliance sales almost certainly was helped by the bankruptcy of hhgregg, Inc. (OTCMKTS:HGGGQ) and the continuing collapse of former appliance giant Sears Holdings Corp (NASDAQ:SHLD). There has to be a sense that some of those tailwinds are largely one-time.
Meanwhile, the Amazon threat isn’t gone, and Best Buy should be doing reasonably well in what’s a better economy. There still are risks ahead, and expecting accelerated sales growth from Best Buy seems too aggressive. Still, few observers expected a 34% increase in BBY stock in a matter of months, or more than 100% return from early 2016 lows. Best Buy clearly has found itself a place in the increasingly turbulent U.S. retail environment.
But as good as Q1 earnings numbers looked, Best Buy still has challenges ahead, and it’s still seeing some of its sales taken by online competitors. The company is keeping enough of that revenue to keep margins intact, and growth decent. But near $60, BBY stock is starting to price in better than just “decent.” Longer-term, that could become a problem.
As of this writing, Vince Martin has no positions in any securities mentioned.
