Retailer of consumer electronics Best Buy (NYSE: BBY) is the latest and the largest pure-play electronics big box store. They have outlasted previous competitors such as Circuit City, CompUSA, The Wiz, Erol’s, Best Products, Radio Shank, HH Gregg and Sam Goody’s to name a few. The main competitors today are either privately owned, such as Microcenter, or have basic electronics in addition to other consumer products Like it Walmart (NYSE:WMT), Costco Wholesale (NASDAQ: COST)and Target (NYSE:TGT). Expectations were low heading into the Q3 2022 earnings report, especially as 2021 was such an outlier year for PC and TV sales. They beat their own lowered Q3 2022 guidance, allowing them to increase estimates for the full year 2023. The one-two punch combination caused stocks to surge and break through the downtrend channel on strong volume. While the consumer electronics segment was very popular with the pandemic, investors were concerned about what the picture would look like with normalization. Since Best Buy is literally the last man standing, next to a regional player Conn’s (NASDAQ: CONN), they act as a whistleblower for the consumer electronics segment. The company has stated that normalization returns this christmas shopping season with concentrated purchases during Black Friday through Cyber Monday and the two weeks leading up to December 25e. The company also resumed its $1 billion share repurchase program in November 2022.
Lowered expectations amplify strong earnings growth
On November 22, 2022, Best Buy released its fiscal third quarter 2022 results for the quarter ending October 2022. The company reported earnings per share (EPS) of $1.38 excluding one-time items versus consensus analyst estimates for a profit of $1.02, a profit of $0.36. Revenues fell (-11.1%) year over year (YoY) to $10.59 billion, beating consensus analyst estimates of $10.30 billion. Domestic sales were down (-10.8%) year-over-year driven by a decline in comp sales of (-10.5%), while street expected (-12%). While they showed negative metrics on a year-over-year basis, such as a decline in consumer electronics sales (-12.8%), a decline in computers and mobile devices (-11.4%), and a decline in appliance sales (-9 .6%), the market gave it a chance due to its exceptional performance in 2021 due to pandemic-induced pent-up demand. Best Buy was able to handily beat its own lowered bar, allowing it to raise its full-year 2023 outlook. It is worth noting that BBY was adept at cutting costs, sizing inventory correctly, and reducing headcount to support promotions and exceed estimates. SG&A expenses nearly decreased (-9%) due to cost savings to $1.77 billion.
Normalization of the holiday season
CEO Corie Barry makes specific comments about the upcoming Christmas shopping season: “We expect shopping patterns to be more like historic holiday seasons than what we’ve seen over the past 2 years. In particular, we expect there to be more shopping activity from customers, concentrated on Black Friday, Cyber Monday and the two weeks leading up to December 25.”
Analysts are not yet convinced
Investors want to know what happens after Christmas. Many analysts have expressed some skepticism as the company essentially beat its own lowered Q3 2022 guidance. Heavy promotional and discount pressures took a toll on domestic gross margins by (-150 bps) to 21.9% year-over-year and non-GAAP operating margins fell by (-190 bps) 3.9%. Margin compression was one factor in the year-over-year decline in adjusted earnings per share (-34%). UBS analyst Michael Lasser maintained his Hold rating on Best Buy stock with a price target of $76, which is below where it traded in the $80 post earnings call. Truist analyst Scot Ciccarelli also maintained his Hold rating on Best Buy with a price target of $69, citing that perhaps the worst sales declines are in the past as the risk of downgrades stabilizes on the way to holiday sales.
Weekly downtrend reversal
The weekly candlestick chart on BBY has been in a downward trending channel since peaking in March 2022 just above $109. This was followed lower by the downtrend in the 20-period weekly exponential moving average (EMA), which last topped the channel of the downtrend stood at $73.13. The falling 50-period MA sits at $83.19. The downtrend eventually produced a swing low on October 10e, at $60.79 and formed a market structure low (MSL) buy trigger above $68.70. The weekly stochastic eventually bounced through the 20 band on a strong mini-pup formation that caused stocks to break through the weekly 20 period MA and the upper trendline of the downtrend channel near 73.20 at large volume its strong Q3 2022 earnings report. The weekly stochastic is now pushing through the 50-period resistance level as stocks rally to retest the weekly 50-period MA at $83.19. Pullback support areas sit at $73.06 near the weekly 20 period EMA, $70.73, $68.70 weekly MSL trigger, $67.40, $64.29 and the $60 weekly swing .79