Best Buy shares jumped Thursday as management argued that a cycle of artificial intelligence upgrades for personal computers and devices was beginning to unfold. The company’s first-quarter fiscal 2025 revenue fell 6.5% year-over-year to $8.85 billion in the quarter ended May 4, missing the $8.96 billion of dollars expected by analysts, according to estimates compiled by LSEG. Adjusted earnings per share of $1.20 increased 5.3% on a yearly basis and exceeded the $1.08 forecast by analysts, according to LSEG data. BBY YTD Mountain Best Buy YTD Best Buy stock’s roughly 13% gain was entirely due to what was said on the post-earnings conference call about how consumers will want the latest and greatest features of AI on their PCs and smartphones, which means more stores and online traffic and more sales for the electronics retailer. Bottom Line It was a better than expected quarter for Best Buy. Although sales missed their target, both domestically and abroad, the company is operating more efficiently than the Street expected, as profitability results have been better than expected. Same-store sales were insufficient. But management said on the call that “gains in services and laptops” helped offset struggling categories such as home appliances. The services, which include membership offers, have helped improve the company’s gross margin. Services is one area that Best Buy can lean on and leverage to differentiate itself from online retailers like Amazon. Although Amazon can compete on price and deals, it doesn’t have physical locations like Best Buy, making it difficult to compete in terms of in-person customer experience, product setup, or technical support. That’s not to say Best Buy is sitting idly in e-commerce, the company is moving forward with its omnichannel experience, with CEO Corie Barry saying on the call that “the fulfillment experience continues to improve, with nearly 60% of our packages delivered.” or available for same-day pickup, and 40% of our digital sales are picked up in-store by our customers, with more than 90% of those orders available in just 30 minutes.” Best Buy Why we hold: We took a position in Best Buy because we believe it will prove to be a go-to destination for consumers looking to upgrade hardware, much of which was purchased during Covid, to new AI-powered devices. Computers and mobile devices typically last around four years, reflecting how far we are from the start of the pandemic, when everyone was building their home office. In the meantime, we’re happy to remain patient while the thesis continues. comes to fruition thanks to the annual dividend yield of around 5% Competition: Target, Walmart, Amazon, Costco Most recent purchase: April 30, 2024 Launched: March 27, 2024 Consumer health remains a key element to monitor and this is not the case. is not unique to Best Buy. “Macroeconomic factors continue to fluctuate and put pressure on consumer spending,” Barry said. She goes on to state that “consumers continue to make difficult choices when it comes to budgeting, cutting back in some areas while prioritizing spending in others, such as services and experiences like travel.” This, in combination with the rise of technology purchases in the early years. of the pandemic and lower levels of hardware innovation, have led to a continued decline in demand for more expensive consumer electronics and a focus on value and offerings for today’s buyers. With that in mind, the team is always looking for new ways to improve the customer experience and Best Buy’s CEO remains confident that key categories will return to growth. She cited technological innovation, such as AI-enabled PCs, as a key enabler. Computers and mobile phones accounted for 44% of Best Buy’s domestic sales in the quarter, or 50% of international sales, making it by far the largest and most meaningful category for the company. Barry expects IT to benefit as the year goes on, thanks to AI-driven hardware replacements and upgrades. We of course agree with this view, especially as we are now more than four years from the start of the Covid pandemic, a time when many people were building home offices. PCs and mobile phones typically have a life cycle of around four years. While some might look to expand on this, the temptation and justification for upgrading will be easier this time around, thanks to the increased capabilities of machines designed for AI. “We saw the first signs of improvement as year-over-year comparable sales for notebooks turned slightly positive in the fourth quarter, and this trend continued into the first quarter,” Barry said . Importantly, she noted that not only will Best Buy offer the largest assortment of AI-enabled PCs, but more than 40% of that assortment will be exclusive to Best Buy. Coming back to how Best Buy can compete with Amazon, Best Buy works closely with suppliers on marketing strategies and demonstrations to deliver a “unique educational and interconnected digital shopping journey.” In another sign of how more powerful devices can drive foot traffic, Barry said Apple’s new M4-equipped iPads are “already contributing to improving sales trends this quarter.” Although the reported results have been mixed, it is a combination of better-than-expected profitability and signs that a broad computing upgrade cycle, catalyzed by the arrival of machines equipped with AI, is on the agenda as we progress through the year. We believe our core investment thesis is intact and therefore reiterate our 1 equivalent Buy rating and $95 per share price target. Guidance For fiscal 2025, management said it expects sequential improvements in same-store sales results and is trending toward the midpoint of the targeted range. Nonetheless, the team believes that even at the midpoint of its same-store sales guidance, it can achieve adjusted operating income toward the upper end of the targeted range, driven by strong membership gross profit margins. and service offerings. However, forecasts for the whole year remained unchanged. Revenue of $41.3 billion to $42.6 billion, a hair ahead of the midpoint estimate of $41.94 billion, according to FactSet. Same-store sales down 3%, flat, which is entirely in line with expectations. Adjusted operating margin between 3.9% and 4.1%, also in line with the consensus estimate of 4%. Adjusted earnings between $5.75 and $6.20 per share, slightly below the midpoint estimate of $6.04 per share. (Jim Cramer’s charitable fund is long BBY, AMZN. See here for a complete list of stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charity’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY OBLIGATION EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
Bimal Tandel photographs Bhavin Tandel and Dinesh Tandel, crew members of the Klara Oldendorff, outside a Best Buy in Timonium, Maryland, United States, March 29, 2024.
Julia Nikhinson | Reuters
Actions of Best buy erupted Thursday as management argued that a cycle of artificial intelligence upgrades for personal computers and devices was beginning to unfold.