Best Buy Slides as Strong Sales Mask Margin Concerns
Shares fall despite beating Q2 estimates, as investors focus on declining profitability and a cautious outlook.
Best Buy Co., Inc. shares fell nearly 5% on Thursday, as investors looked past better-than-expected second-quarter earnings and focused instead on underlying weaknesses in profitability and a cautious outlook from management.
The electronics retailer reported adjusted earnings of $1.28 per share on revenue of $9.44 billion for the quarter, beating analyst expectations. The company also posted a comparable sales increase of 1.6%, its highest growth in three years, driven by strong demand for gaming consoles, computers, and mobile phones.
Despite the top-line beat, the positive results were overshadowed by concerns about the company's financial health. Investors were spooked by a significant 9.7% miss on adjusted EBITDA and a decline in the company's gross profit margin. The domestic gross profit rate edged down to 23.4% from 23.5% a year earlier, which the company attributed to a higher mix of sales from lower-margin products.
Adding to the pressure, Best Buy's operating margin fell to 2.7% from 4.1% in the same period last year, signaling that rising costs are eating into profits. The market's negative reaction was further fueled by the company's decision to simply reiterate its full-year guidance rather than raising it after the quarterly outperformance. Best Buy continues to expect full-year adjusted earnings between $6.15 and $6.30 per share.
In the earnings release, CFO Matt Bilunas acknowledged the challenges ahead. "Given the uncertainty of potential tariff impacts in the back half, both on consumers overall as well as our business, we feel it is prudent to maintain the annual guidance we provided last quarter," he stated.
The company also announced it incurred $114 million in restructuring charges during the quarter as part of a plan to better align its resources with changing consumer behaviors. While analysts largely maintain 'Buy' or 'Hold' ratings on the stock, the post-earnings stock slide indicates that investors remain unconvinced about the retailer's ability to navigate a challenging consumer environment and protect its profit margins.