Best Buy Earnings Will Shine. Here’s What They Mean for the Stock. - Barron's

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An image of the sign for Best Buy as photographed on March 16, 2020 in Levittown, New York.

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Best Buy will report third-quarter earnings on Tuesday, and it could be another strong showing for the consumer electronics retailer, as it builds on pandemic-related trends.

Best Buy (BBY) stock has already added about 36% year to date, putting it ahead of other big-box retailers. Much of that strength has been a result of Covid-19. Best Buy has notched robust online sales as people snap up computers and tablets to facilitate their stay-at-home life, with digital business continuing at a fast clip even after most of its stores reopened from earlier lockdowns.

That’s led many analysts to predict that Best Buy will emerge from the pandemic a retail winner, and Barron’s noted this summer that it could be a share gainer during this untraditional back-to-school season. We should get more detail on that next week, but with coronavirus cases spiking and schools closing, distance learning and working will likely remain tailwinds in the near term.

Foot traffic data seems to support optimism as well. According to data from Placer.ai, visits to Best Buy were up 1% in October, the first time that figure turned positive since February, before the pandemic began.

Moreover, that figure improved throughout the month. Visits the weeks beginning October 12^th, 19^th, and 26^th were up 2.9% year over year on average, while the three weeks before that were down 13.2%, Placer.ai notes, an encouraging sign given that the company has done well to monetize its brick-and-mortar locations even as digital sales climb.

Yet Covid isn’t the only reason to like Best Buy. Apple (AAPL) launched its latest iPhones in October, and while there hasn’t been much data in the intervening weeks, initial orders for the models look promising, helped by the diverse offerings and the brand’s ongoing cachet.

We might not hear much about the iPhone from Best Buy, given the recent release, but smartphones could remain a catalyst through the holiday season and beyond, especially as Samsung Electronics (005930.Korea) is reportedly mulling releasing its own updated smartphones early, in January.

That’s not to say that the stock will necessarily trade higher after the release: A better-than-expected second quarter didn’t help the stock when it last released earnings—blame sky-high expectations—and, like many other stay-at-home plays, Best Buy’s stock has sold off on positive vaccine news.

Given the stock’s rally, expectations are still lofty. And with investors eager to rotate into reopening bets, Best Buy will have to prove it can maintain its pandemic momentum.

However, investors have shown they’re willing to reward retailers that deliver this earnings season. That’s especially in terms of same-store sales, which has been an area of focus as markets sniff for clues about post-Covid trends. If increases in foot traffic translate to more physical store sales, while its digital channel remains strong, it would likely be considered good news.

Best Buy is up just over 8% in the past three months. Trading at 16.5 times forward earnings, it’s above its five-year average of 13.1 times, but has backed off its high of more than 19 times that gave some analysts pause. It’s also one of the cheaper big retailers on a price-to-sales basis.

Analysts expect EBIT—earnings before interest and taxes—margins to expand to 5.4% this year, easily above its average; return on equity and assets of 41.5% and 10.3% are likewise ahead of historical levels.

Consensus calls for EPS to jump more than 18% this year to $7.19; and while that figure is expected to climb just 1% next year, to $7.26, that’s still meaningfully above 2019’s $6.07. In addition, analysts expect revenues will stay elevated: The average estimate is for sales to rise 4.2% this year, to $45.5 billion and 1.6% next year, to $47 billion. That compares to $43.6 billion last year.

Ultimately, Best Buy has been a major beneficiary from Covid, and the virus looks poised to loom large over the winter. If it can convince investors that its post-vaccine outlook is just as bright, that could lead to more gains.

Write to Teresa Rivas at teresa.rivas@barrons.com

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Best Buy Earnings Will Shine. Here’s What They Mean for the Stock. - Barron's
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