Buy Best Buy Co Inc (BBY) Stock Before Q2 Earnings

There’s still good value in Best Buy stock despite its already huge run

I don’t often go out on a limb and recommend investors buy a stock before earnings, but that’s what I’m doing with Best Buy Co Inc (NYSE:BBY), as BBY stock gets better by the day.

The new Switch game console is flying off the shelves and generating positive same-store sales for Best Buy, helping bring BBY stock to within 3% of its all-time high of $63.32.

Yes, the markets are frothy, and a correction is likely just around the corner, but you can’t deny when a stock has momentum. Up nearly 50% year-to-date, BBY stock is most definitely on a roll.

Since the end of 2015, Best Buy stock is up 100%-plus. That’s an annualized rate of return of 53%. A stock doesn’t make this kind of move without some financial and business underpinnings to justify it.

Here are several things to watch for when Best Buy announces its second-quarter earnings Tuesday before the markets open.

Same-Store Sales

Best Buy’s delivered same-store sales growth in three out of the last four quarters; Jefferies Group analyst Daniel Binder estimates Q2 same-store sales growth of 2.5%, 90 basis points higher than in the first quarter and 170 basis points better than its same-store sales growth from a year earlier.

“Gaming likely saw a second quarter of comparable store sales growth driven by the portable Nintendo Switch and the 1TB PlayStation 4 Slim golf consoles,” Binder wrote in a note to clients. “NPD reports that gaming hardware sales were up 7% in May, 27% in June and 29% in July.” 

Unfortunately, the Jefferies analyst is hesitant to jump on the bandwagon given the ongoing commoditization of 4K TV. As a result, he gives BBY stock a “hold” rating.

It seems like Best Buy is always facing some headwind that we in the business media predict will be the retailer’s ultimate undoing but it’s still here while competitors fall by the wayside.

Online Sales

One of the big initiatives CEO Hubert Joly implemented at the company was to turn every store into a quasi-distribution center for its online business. That enables each of the stores to optimize its footprint and use of personnel while improving the omnichannel shopping experience.

Joly took the top job in August 2012. At the time, Best Buy didn’t even break out online revenues from the rest of its business. Only starting in Q1 2015 did it break out its online revenue; at the time it was 8.2% of its domestic revenue or $638 million.

Fast forward to Q1 2018 and its online revenue was 12.9% of its domestic revenue or $1.02 billion, the first non-holiday quarter to go over a billion dollars. Moreover, its online sales grew by 22.5% in the quarter, 780 basis points greater than the average for online sales for the entire country.

As long as online revenue continues to grow as a percentage of its overall sales, I see a business that will continue to do a good job battling, Inc. (NASDAQ:AMZN) for e-commerce customers.

Analysts expect Best Buy to deliver $8.7 billion in revenue and earnings of 63 cents per share. The last four quarters, Best Buy’s earnings have averaged a positive surprise of 32.8%. That’s a sign of a conservative management team.

Joly and company’s guidance for Q2 falls between 57 cents and 62 cents per share. In May 2016, its Q2 2017 earnings guidance was between 38 cents and 42 cents; it delivered EPS 15 cents above the high-end of its projection.

I’d be shocked if it didn’t deliver earnings at least 10% to 20% higher than the 63 cents expected by analysts.

The Lowdown on BBY Stock

Around this time four years ago I wrote that Best Buy was on the right side of its turnaround under CEO Hubert Joly. BBY stock proceeded to go into the tank taking a full three years to rise above $40.

To me, to pay $62 today for Best Buy is a far better deal than if you paid $40 for its stock late in 2013.

Five years on the job, Joly still has some work to do, but the heavy lifting has already been done.

Whether he stays another five years or chooses to move on to the next challenge — perhaps Target Corporation (NYSE:TGT), another Minneapolis retailer — he’s earned the high regard of shareholders and financial writers such as myself.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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