Last month, Best Buy (BBY -0.09%) cut its sales and profit outlook for the rest of 2022, causing the stock to sell off. The stock just reported second-quarter earnings, and while results were down, the stock rallied, as results weren't as bad as investors expected. Shares are down 47% from their 52-week high, and after this reset, Best Buy looks like an appealing investment opportunity. Here's why.
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A hard reset
While comparable-store sales were down 8%, this was partially because Best Buy was lapping a quarter when the pandemic was still driving demand for electronics, computers, and home entertainment and consumers were still flush with stimulus cash. For context, Best Buy's comparable-store sales were still up 8% compared to the second quarter two years ago. Within individual product categories, sales of computers and home appliances were down from last year, but up 20% and 45%, respectively, when compared to the same time frame during 2020. Sales are still on an upward trajectory over a multiyear time frame, but they aren't growing at quite the rate that they were during 2021's unprecedented environment. The business thus seems to be in a better position than it was two years ago.
With Best Buy warning customers about this quarter's results and lowering guidance ahead of time, it seems like this is a bit of a "kitchen sink" quarter and perhaps a reset point for the stock as it gets ready to turn the corner.
Carving out a niche
In a world where consumers are used to acquiring products with the click of a button on Amazon (AMZN 1.34%), retailers like Best Buy need to differentiate themselves and give customers a reason to shop there. The good news is that Best Buy is working to make itself a differentiated option. Best Buy has taken advantage of its large physical footprint (over 1,100 stores in the United States and Canada) to offer one-day shipping to 99% of U.S. zip codes.
Best Buy's large sales staff gives it the ability to provide post-sale support for products that some customers may have trouble setting up or navigating, which differentiates it from online sellers like Amazon. This support not only keeps Best Buy's customers satisfied but also makes it a valuable partner for companies like Apple (AAPL -0.91%) and Samsung (SSNL.F -28.74%) since Best Buy is helping their end users at the point of purchase.
Furthermore, Best Buy seems to be onto something with its Totaltech program. Members pay $199 a year and get access to 24/7 tech support from the Geek Squad, free two-day shipping, and access to special prices and promotions. But perhaps most importantly, members get free delivery and installation on standard Best Buy purchases. Having Best Buy deliver and install a new refrigerator or dishwasher and take away the old one has tremendous appeal to a lot of potential customers. Best Buy can also, for example, mount a new flat-screen TV. Best Buy CEO Corie Barry says that she is encouraged by the program's growth, especially at a time when overall sales are down, and describes it as "a near-term investment to drive longer-term benefits" and says that "over time, we expect the incremental spend we garner from members will lead to higher operating income dollars." Barry states that the company's net promoter scores (which measure how likely a customer is to recommend a product or service to a friend or colleague) for installation and repair have been increasing compared to pre-pandemic levels, which seems to indicate that these efforts are working. These types of services make Best Buy stickier and help it to compete with the likes of Amazon.
Dividend growth at a bargain price
Shares of Best Buy are cheap, trading at just eight times earnings. This is well below the S&P 500's average of about 17 times earnings. While Best Buy faces challenges from inflation and decreased consumer discretionary spending power, at these levels, the challenges appear to be reflected in the stock price.
In addition to this inexpensive valuation, Best Buy also pays out an attractive dividend. Shares yield 4.7%, which is well above the market average. The company has been steadily increasing its dividend payout for the past decade-plus, and the annual payout has more than doubled since 2017. Best Buy boosted its quarterly payout from $0.70 a quarter last year to $0.88 a quarter in 2022. This is a consistent dividend payer with a high yield and a great dividend growth story.
Is Best Buy a "best buy"?
In conclusion, much of the bad news seems to be in the rearview mirror and priced into the stock, and Best Buy is a business that is in stronger shape than it was before the pandemic. Shares trade at an inexpensive valuation and the company presents a compelling dividend growth story. Best Buy is carving out a spot for itself in an evolving consumer market and appears sufficiently differentiated from the competition, making it look like a good long-term investment opportunity at these levels.
