Earnings Results: Best Buy stock boosted by big profit beat in face of ‘intense’ promotional environment

“We now expect to spend a total of approximately $1 billion in share repurchases this fiscal year,” Bilunas said, according to a FactSet transcript. That represents about 5.6% of Best Buy’s market capitalization of about $17.98 billion.

Separately, CFO Bilunas said the company is “committed to being a premium dividend payer.” Based on current stock prices
BBY,
+12.78%,
the annual dividend rate implies a dividend yield of 4.41%, which is well above the yield for the SPDR Consumer Discretionary Select Sector exchange-traded fund
XLY,
+1.13%
of 0.86% and the implied yield for the S&P 500 index
SPX,
+1.36%
of 1.67%.

The stock surged 12.8% to close at $79.88 on Tuesday, enough to lead the S&P 500’s gainers. It was the biggest one-day gain since it soared 16.8% on March 24, 2020, and the biggest one-day post-earnings rally since it ran up 14.1% Feb. 27, 2019 after fourth-quarter 2018 results.

The company reported before the open adjusted earnings per share that beat expectations by 33.7%, the biggest beat percentage since second-quarter 2021 EPS topped by 57.3%, according to FactSet. Revenue fell 11.1% to $10.59 billion, but beat expectations of $10.31 billion, and the same-store sales decline of 10.4% beat forecasts for a 12.9% drop.

The fiscal 2023 same-store sales guidance improved to a decline of approximately 10% from a fall of about 11%.

The gross profit rate contracted year-over-year for a fifth-straight quarter, to 21.9% from 23.4%, due in part to increased promotions, lower services margin rates and higher supply chain costs. But merchandise inventories of $7.29 billion as of Oct. 29 was down 14.7% from a year ago, after falling 5.8% in the second quarter.

The inventory improvement comes while other retailers have struggled to deal with excess inventory, leading to increased discounting, lower margins and in some cases, big EPS misses.

Chief Executive Corie Barry explained on the post-earnings call that the inventory decline was due in part to timing, with about $600 million in receipts coming in a bit later-than-expected, after the quarter closed. Also, she said there was an “unusually high level of inventory” last year, as levels were boosted ahead of the holidays due to concerns over supply constraints.

That said, lower inventory levels didn’t shield the company from a retail environment of heavy discounting.

“The promotional environment continues to be considerably more intense than last year,” Barry said on the call, according to a FactSet transcript. “[T]he level of promotionality in Q3 was similar to pre-pandemic levels and in some areas was even more promotional as the industry works through excess inventory in the channel as well as response to softer customer demand.”

She added that average selling prices (ASPs) will likely continue to be lower than last year, as promotional activity, which was largely absent during much of the pandemic, has returned.

For the holiday season, November tends to see the largest inflows of inventory for the quarter, but Barry said Best Buy will continue to receive inventory every week throughout the season to replenish what has been sold.

“While aligning inventory levels with uncertain and evolving customer demand is always challenging, we are well positioned and feel confident we will be able to react to quickly to changes we may see in customer demand,” Barry said.

Best Buy’s stock has advanced 1.3% over the past three months, while the SPDR Consumer Discretionary Select Sector ETF has tumbled 14.0% and the S&P 500 has slipped 3.0%.