Best Buy reports earnings beat despite sales decline

Yahoo Finance Live anchors discuss second-quarter earnings for Best Buy.

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BRIAN SOZZI: Not the Best Buy. Best Buy is out with better-than-expected profits this morning, but the quality of the earnings report or lack thereof should be, should be in focus. The electronics retailer saw US same-store sales tanked 12.7%, missing analyst estimates. Sales fell in all product categories. And third quarter guidance hints had a slow start to the back-to-school shopping season.

Brad, we knew this quarter was coming. They came out here and warned. So I guess, the market is celebrating mediocrity. But if you dug into this report, you saw declines in all product categories, large declines. Minus-16.6% decline in the computing and mobile phone category. That is not good. You had them come out here and talk about third quarter guidance, sales and profits look to be tracking worse than they were in the second quarter. All that, not good.

BRAD SMITH: Yeah, you've got Matt Bilunas, who is the CFO of Best Buy, who had basically come out and said, to your point, as it relates specifically to Q3, fiscal year 2023, they anticipate that those comp sales are going to decline by-- get this-- more than the 12.1% decline that they've reported for this second quarter. They also anticipate that year-over-year decline in some of their operating income rates will be very similar or slightly more than this most recent quarter that they're reporting for.

And so with all of this considered across the comparable sales, we also got to think about the fact that so much of Best Buy for the everyday consumer out there is a discretionary item that you're spending on. And what is discretionary done this year? We've seen a major pullback, especially with that shift in purchases from goods to services over the course of this summer. No doubt it was gonna hit Best Buy this quarter.

BRIAN SOZZI: Yeah, look, I was thinking coming into this, have I been too tough on Best Buy? Now, our inventory-- our global inventory expert Connor Hickey, he pulled out this morning, inventory down 5.8%. I have not seen a decline in inventory yet throughout the retail reporting season so far, so that is good at least on surface. But when you take that decline, stack it up against sales that are look to be, perhaps, declining 13% so far to kick off the third quarter. It's not exactly great.

So they probably have more room or more things they should be doing to bring inventory levels down. I will also note this, too, expense levels in that domestic Best Boy-- Best Buy stores, or just another way of looking at it, those US stores, appear to be too high for the sales run rate they are seeing.

Which begs the question, what should they be doing, Best Buy, to lower expenses even further? It looks like they did take some restructuring charges in the quarter. What else could they and should they be doing to improve profits?

BRAD SMITH: This is where that replenishment rate is actually showing up and the lack thereof, particularly on the inventory side. Because if you flip that replenishment rate on its head to say, when replenishment rates are needing to be higher, you would see a company in Best Buy actually have a surplus of inventory and those inventories continuing to move up. That being up negative, a bad thing, which is why we had in red on that graphic there.

But the reason why we had it in green, moving down, because, yeah, they're actually churning through some of it. But that's because they're ordering less of it from the suppliers as well. And so that's where it gets back into that replenishment rate of some of the deflationary items that consumers are not going back to purchasing because there's not the same cyclicality to get a new pair of shoes from Foot Locker or Dick's, as there is to get a new refrigerator with a touch screen on it.

BRIAN SOZZI: Yeah, no, look, this quarter from Best Buy suggests we could see probably a disappointing quarter from HP after the close today. Of course, they are large in printers and various other PCs. But you know, I've been going to these Best Boy-- Best Buy stores a lot lately to buy various gadgets for myself.

BRAD SMITH: Right.

BRIAN SOZZI: There's still a lot of employees on the sales floor. You get greeted right when you walk in. It bothers me. I just want to be left alone. I just want to walk into these stores, I want to buy my overpriced--

BRAD SMITH: People like greeting.

BRIAN SOZZI: Just leave me alone. God--

BRAD SMITH: That bothers you?

BRIAN SOZZI: Just-- leave me alone. It does. I don't want to be bothered. I just want to buy my phone case, get out of the store, and just leave me alone, man.

BRAD SMITH: You're still coming at my phone case here?

BRIAN SOZZI: Just leave me alone. What's that?

BRAD SMITH: It seems like a subtle dig at my phone case.

BRIAN SOZZI: I'm not-- you said that, not me.