Best Buy ‘s quarter came up short of expectations, with the misses compounded by downward revisions to management’s outlook for the remainder of the year. We were not surprised by Tuesday morning’s print and have a plan. Revenue in the company’s fiscal 2025 third quarter fell 3.2% year over year to $9.45 billion, missing the $9.76 billion expected by analysts, according to estimates compiled by LSEG. Adjusted earnings per share in the three months ended Nov. 2 dropped 2.3% to $1.26, also coming up short. LSEG estimates called for EPS of $1.29. BBY YTD mountain Best Buy YTD These were not the results we wanted from Best Buy, but they are the numbers we had expected. That’s why we recently took measures to protect hard-fought gains in the position. We trimmed shares in late October and last week in the high and mid-$80s. Jim Cramer said it’s too soon to buy back those shares on Tuesday’s roughly 6% post-earnings stock decline. Bottom line While management indicated that November is off to a good start, high mortgage rates and uncertainty regarding increased tariffs under President-elect Donald Trump ‘s administration pose headwinds that cannot be ignored. Lots of electronics are made overseas. As we wait for clarity, we’re trimming our price target to $100 per share from $110 but maintaining our 2 rating. Jim said Tuesday he would consider adding shares if they were to drop into the $70s. Best Buy stock below $80 would push the dividend yield up to just under 5% — a nice payout for our patience. We still believe in the stock because Best Buy should benefit once mortgages drop and housing turnover picks up. The high cost of buying a home has been a headwind for big-ticket items like appliances and home theater setups. The boost we expect from artificial intelligence PC sales and iPhone upgrades is also taking longer than anticipated. Best Buy Why we own : We believe Best Buy 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. We also see Best Buy as a beneficiary of an expected uptick in housing formation. When people buy homes, they need to fill them up with big-ticket items like appliances and home theaters. Competition : Target , Walmart , Amazon , Costco Most recent buy : July 2, 2024 Initiated : March 27, 2024 Commentary Best Buy CEO Corie Barry attributed the quarterly sales weakness to a combination of macroeconomic uncertainty, purchase delays in anticipation of the holiday season – why buy a TV in October when all the sales start in November, around Black Friday – and, what she called the “distraction during the run-up to the election.” That said, Barry did add that demand has picked up in Best Buy’s fiscal 2025 fourth quarter now that the presidential election is behind us and holiday sales are ramping up. “Enterprise comparable sales for the first three weeks of November are up approximately 5% over last year,” she said on the post-earnings conference call. We were encouraged by the expansion we saw at the gross margin level in the fiscal third quarter, largely attributable to improved services, including memberships. However, the adjusted operating margin contracted slightly as revenue came down while selling, general, and administrative expenses remained about flat versus the year-ago period, on a dollar basis. We would expect to see the operating margin rebound, though, as sales pick back up and the company can better leverage its fixed costs. On the call, CFO Matthew Bilunas said that fiscal 2025 fourth quarter adjusted operating income should land in a range of 4.6% to 4.8%, up from the 3.7% rate in the reported quarter. While that would still be below the 5% rate seen in the fiscal 2024 fourth quarter, it should be noted that the year-ago period had an extra week that management estimates added to sales by about $735 million and added about 40 basis points to the adjusted operating margin. So, accounting for that, we should see some year-over-year improvement in fiscal 2025 fourth-quarter profitability, at the midpoint. The gross margin is also expected to see some year-over-year expansion. For the holidays, it’s all systems go, with Barry noting that the team opted to kick off Black Friday sales a week earlier than last year and brought back “doorbusters,” with new deals every Friday between Nov. 8 and Dec. 20 and special deals for paid members. In the Best Buy app, the company also launched the “Best Buy Gift Finder,” an AI-powered gifting guide to help consumers find new products. Furthermore, we were pleased to hear how management is leaning into the experiential aspect of buying technology. It’s no secret that online shopping is chipping away at brick-and-mortar retail. Best Buy, however, is uniquely positioned to combat this by leveraging its physical locations, which allow consumers the ability to interact with expensive tech in person and talk with a salesperson. “For example, customers can see XL TVs, which are over 97 inches at more than 700 stores. They can also interact with Copilot+ PCs (from Club name Microsoft ), the new Aura Ring, Ray-Ban AR glasses (powered by Club name Meta Platforms ), gaming computers, the latest Quest VR systems (again, Meta), new over-ear headphones, and so much more,” said Barry, who also touted in-store pick-up for purchase made online. Looking ahead, we think management is taking the appropriate action to ensure that Best Buy remains a go-to destination for consumers seeking out new technology by enhancing the experiential aspect of trying out innovative products before buying. As a result, we think the company is increasingly well set up to benefit as new products come to market and demand comes back online. Guidance Management updated their financial outlook for the remainder of fiscal 2025, trimming their outlook for sales, earnings, and same-store sales. However, they reiterated their guide on operating income. Revenue is now expected to be between $41.1 billion and $41.5 billion, down from the prior range of $41.3 billion to $41.9 billion, and below the $41.54 billion estimate. Same-store sales are now expected to be down 3.5% to down 2.5%, also down from the prior range of down 3% to down 1.5%. That outlook is also weaker than the 2.1% drop the Street was expecting. Adjusted operating margin was maintained, with the team continuing to target a range between 4.1% and 4.2%. That compares with estimates of 4.2% coming into the print. Adjusted earnings per share is now expected to be between $6.10 and $6.25, which represents a haircut to the top end of the range versus prior guidance of $6.10 to $6.35. That’s below the $6.25 estimate, at the midpoint. (Jim Cramer’s Charitable Trust is long BBY, MSFT, META. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Best Buy‘s quarter came up short of expectations, with the misses compounded by downward revisions to management’s outlook for the remainder of the year.
We were not surprised by Tuesday morning’s print and have a plan.