Best Buy Co. (NYSE: BBY) is putting together what easily is one of the market’s most impressive performances this year.
BBY stock had rallied 45 percent higher on the dot through Aug. 25, good enough to put it in the top 5 percent of Standard & Poor’s 500 index stocks in 2017. That’s better than Apple ( AAPL), that’s better than Alphabet ( GOOG, GOOGL), and it’s even better than Amazon.com ( AMZN) — the retailer that supposedly was sending Best Buy and the rest of the brick-and-mortar space to sleep with the fishes.
Speaking of which, Best Buy is by far and away the best such retailer in the S&P this year, miles ahead of Wal-Mart Stores’ ( WMT) 14 percent lunge.
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This is no dead-cat bounce; Best Buy stock has been in a general uptrend since the start of 2016. In fact, shares have more than tripled since August 2012, when the big-box electronics retailer announced it was appointing Hubert Joly to CEO in an attempt to reverse several years of decay and lost business to the likes of Amazon and Walmart.
Still, Best Buy faces a brutal second-quarter earnings climate in which the market is punishing retailers left and right, swatting down shares even after encouraging upside surprises. Just ask Home Depot ( HD) and Kohl’s Corp. ( KSS).The question is: Can BBY keep up its improbable run?
We’ll look at what to expect of Best Buy’s Tuesday morning earnings report, as well as other significant earnings announcements due out this week.
The headline numbers. Wall Street’s expectations for Best Buy are modest, but they’re at least pointed in the right direction. Revenue is estimated to climb a mere 1.5 percent to $8.66 billion. Domestic comparable-store sales also are expected to improve, in a range of 1.5 percent to 2.5 percent.
Profits could be interesting, however. For one, analysts are forecasting a 10.5 percent year-over-year jump in earnings to 63 cents per share. But behind the scenes, Wall Street’s pros are even more optimistic, with a whisper number sitting much higher at 69 cents per share.
Can BBY put up another lunker quarter? Best Buy shocked the analyst community on almost every front when it reported first-quarter earnings in May. It posted better-than-expected profits and revenue, and despite warning back in March that comparable-store sales could decline 1 to 2 percent, it reported a 1.6 percent uptick. Best Buy also doubled down, saying Q2 comps would be 1.5 to 2.5 percent better.
The “why” is what matters, and gives us a clue as to whether Best Buy can repeat this quarter.
Best Buy’s longtime top-line decay — which despite the retailer’s improvements haven’t stopped, but have stabilized — largely came on the back of the “showrooming” phenomenon, where consumers would compare and test out goods in Best Buy’s physical stores, then purchase them for cheaper on Amazon.com or another retailer’s website.
Joly combatted this phenomenon on several fronts, revitalizing the company’s e-commerce operations, improving the in-store experience and emphasizing the value of Geek Squad — Best Buy’s technical support arm. Today, Best Buy remains consumer electronics’ leader (by revenue) in market share.
Geek Squad was a brief source of worry this summer. In early July, reports pegged Amazon as quietly building up its own gadget installation and repair service. Best Buy’s announcement later in the month that it was eliminating 399 Geek Squad positions could have been construed as a connected red flag. However, the trimming only affected remote employees, and the retailer said it was trying to move many of those workers either in-house or have them perform work on location. Amazon’s presence, though, still is worth monitoring.
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Nonetheless, Best Buy’s transition is real. The company’s “Renew Blue” initiative, in place since 2012, has resulted in 9 percent annual earnings-per-share growth on average. Comps aren’t just stabilizing — they’re back to growing. And at least one analyst is optimistic about the coming quarter.
Jefferies analyst Daniel Binder wrote to clients last week, saying he sees Best Buy’s domestic same-store sales coming in at the high end of management’s expectations, raising his own expectations from 2 percent to 2.5 percent. He also upgraded earnings estimates from 59 cents per share to 66 cents.
Among his reasons for optimism: strong demand for Nintendo’s Switch console, as well as a full quarter of Samsung S8 and S8-plus availability.
However, one detail from Binder’s report can be interpreted as expressing a worry many other market participants likely share at the moment — that Best Buy might be topping out. He maintained BBY stock at “hold,” and kept a $60 price target that assumes all upside is more than baked in.
While Best Buy shares still trade at a reasonable 15 times forward earnings estimates and just half trailing 12-month sales, their 45 percent advance in 2017 puts a target on the stock’s back amid an overwhelmingly negative retail climate.
Best Buy could put together a Q2 that shows the turnaround still is alive and well, yet still disappoint investors looking for fireworks to justify this year’s screaming rally.
Consider watching Tuesday’s report from the sidelines.
More Earnings in Focus
Dollar General Corp. (DG). Dollar General’s 2017 fortunes have been mixed, with DG stock up less than 5 percent this year to significantly underperform the S&P 500, but the company recovering well following retail’s plunge in the wake of June’s Amazon-Whole Foods buyout announcement. That event managed to overshadow a Street-beating Q1 outing from Dollar General, reported just a couple of weeks prior. This time around, analysts expect Dollar General to grow its top line 7.6 percent to $5.8 billion for the quarter, which should filter down to a slight uptick in earnings, by a penny to $1.09 per share. The Q2 report is scheduled to come out before Thursday’s open.
Lululemon Athletica (LULU). Later that evening, Lululemon will try to maintain its rebound momentum with its second-quarter earnings report. LULU shares were crushed in late March thanks to a wide miss on its first-quarter earnings forecast, which prompted the company to make adjustments to its offerings — including the Enlite sports bra — and website. Menswear is also expected to continue driving growth. Wall Street does expect Lululemon’s revenue to expand by double digits, at 10.3 percent to $567.6 million, but profits are expected to recede by 7.9 percent to 35 cents per share.
This Week’s Earnings Calendar
Monday. Prospect Capital Corp. ( PSEC).
Tuesday. AeroVironment ( AVAV), H&R Block ( HRB), Movado Group ( MOV).
Wednesday. Bob Evans Farms ( BOBE), Box ( BOX), Five Below ( FIVE), Vera Bradley ( VRA).
[See: 8 Ways to Satisfy a Craving for Restaurant Stocks.]
Thursday. Ambarella ( AMBA), Campbell Soup Co. ( CPB), Palo Alto Networks ( PANW), Toronto-Dominion Bank ( TD).
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Is Best Buy Co (BBY) About to Hit a Brick Wall? originally appeared on usnews.com
