Best Buy stock soars on a beat and raise. We think that’s just the beginning

Best Buy ‘s quarterly beat and guidance raise on Thursday was good for a 15% pop in the stock as investors rewarded better execution and the promise of wider adoption of AI devices and lower interest rates. Revenue in the company’s fiscal 2025 second quarter fell 3.1% year over year to $9.29 billion in the three months ended July 29, outpacing the $9.24 billion expected by analysts, according to estimates compiled by LSEG. Adjusted earnings per share of $1.34 rose 9.8% on an annual basis, topping the $1.16 predicted by analysts, LSEG data showed. BBY YTD mountain Best Buy YTD Thursday’s advance sent Club stock Best Buy back above $100 and above our price target of $95. We continue to see further upside ahead, so we’re increasing our PT to $110 per share. We are, however, keeping our 2 rating for the time being, in deference to the speed and magnitude of the stock’s recovery since its swoon earlier this month. Bottom line We see four reasons to be excited about Best Buy’s future: (1) improved profitability, (2) management’s efforts to enhance the in-store experience, (3) signs that generative artificial intelligence will, indeed, drive upgrades of personal computers and mobile devices, and (4) our own view that big-ticket items such as TVs and appliances will get a boost from lower rates leading to more people buying homes and needing to fill them up. While bullish, we acknowledge there’s still work to be done. On the call, Best Buy CEO Corie Barry, said that growth in tablets, computing, and services, was more than offset by declines in appliances, home theater, and gaming. That sluggishness in home entertainment and appliances is largely in line with what we were expecting following quarterly updates from housing-related retailers like Home Depot , Lowe’s , and Williams-Sonoma . However, it’s an area in which we expect to see improvement as Federal Reserve rate cuts lower mortgage rates, which will help drive new home formations. Fiscal Q2 same-store sales, or comps as they’re known in retail, dropped 2.3% from the year-ago period. That was not as bad as the expected decline of 3.2% or the previous quarter’s 6.1% decline. On the post-earnings conference call, management said that July comps were the best of the reported quarter and that August, the first month of the current quarter, was tracking to be about flat. The company sees comps in its fiscal third quarter declining 1%, which was slightly worse than estimates. Best Buy Why we own : 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. Computer and mobile device lifecycles tend to be about four years, which is how far removed we are from the start of the pandemic when everyone was building out their home offices. In the meantime, we’re happy to stay patient as the thesis plays out thanks to a healthy annual dividend yield. Competition : Target , Walmart , Amazon , Costco Most recent buy : July 2, 2024 Initiated : March 27, 2024 Barry said that quarterly online sales held at 32% of domestic revenue, adding that “almost 60% of our packages are delivered or available for pickup within one day, and more than 40% of our digital sales are picked up in stores by our customers.” The omnichannel experience, which allows customers more ways to shop both online and in stores, is important because it incentivizes sign-ups for Best Buy’s paid membership program while providing more ways to engage with the consumer. Management also talked about how they’re working to refresh certain parts of the in-store experience to drive more engagement. “We began in Q2 and will finish in Q3 ahead of the holiday season. Not every store will be touched in the same way, of course, but our plans include optimizing and refreshing mobile phones, headphones, smart home and digital imaging, and creating new experiences in tablets and gaming and computing monitors,” Barry said. “We already can see related sales improvements, particularly in monitors and digital imaging. At the same time, we are updating or creating new branded in-store experiences with our vendor partners, including GoPro , Tesla , Lovesac , Greenworks and Starlink.” Artificial intelligence-enabled personal computers are a major watch item for us as Computing and Mobile Phones accounted for 46% of fiscal second-quarter sales. Barry said that stores’ computing departments have been revamped with a focus on Microsoft ‘s Copilot AI assistant, adding that fully dedicated experts have been added to help educate consumers on the benefits of this new technology. The sales impact, however, remains small at the moment, which we expected. Barry said that AI-enabled PCs are an emerging technology and as such come at a higher price point. “We are just at the beginning of the impact of AI on tech innovation and customer demand.” The team is also now adding experts to the home theater and major appliances departments. We like this focus on increasing the presence of specialized knowledgeable sales associates. It will differentiate the in-store shopping experience from what a consumer can get online. That’s an incredibly important factor for brick-and-mortar success in a world dominated by online shopping. Specialized employees are certified by department, with Barry saying that “certified employees on average drive higher revenue per transaction and stronger overall customer experience ratings compared to non-certified employees. We are ahead of plan with more than 60% of our sales associates certified in at least two categories.” These efforts are an addition to ongoing efforts to increase vendor-provided experts in stores. Best Buy is also leveraging generative AI to improve customer service and help “customers quickly troubleshoot product issues, make changes to their order delivery and scheduling, and even manage their software, Geek Squad subscriptions and membership,” Barry said. In fact, 60% of chat users are now being completely served with generative AI-powered virtual assistants. As a result of management’s effort to leverage technology and improve operational efficiency, Best Buy has managed to reduce its “cost per customer contact by more than 20%, while improving the customer experience.” Guidance Management updated their financial outlook for the remainder of fiscal year 2025. The revisions are mixed, but the key item was an upward revision for full-year earnings, thanks to improving profitability. On the call, Barry said, “We continue to expect sales in our computing category and services to show growth for the year while most other categories are expected to be down for the year. We expect ongoing improvement in their trends at the high end of our annual comp sales guidance for the third quarter.” Revenue is now expected to be between $41.3 billion and $41.9 billion, down from the prior range of $41.3 billion to $42.6 billion, and a tad below expectations of $41.75 billion, at the midpoint. Same-store sales are now expected to be down 3% to down 1.5%, also a downward revision from the down 3% to flat range previously provided. That outlook is also a bit below the -1.8% the Street was expecting. Adjusted operating margin was revised higher, with the team now expecting a result between 4.1% and 4.3%, up from the prior 3.9% to 4.1% range. That compares with estimates of 4.1% coming into the print. Adjusted earnings per share are now expected to be between $6.10 and $6.35 per share, up from the $5.75 to $6.20 per share range previously forecast, and ahead of expectations of $6.07 per share, even on the low end. (Jim Cramer’s Charitable Trust is long BBY, MSFT, AMZN, COST. 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. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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