Why Best Buy's stock is surging, even as sales and full-year outlook disappoint

By Tomi Kilgore

Profit surprisingly rises above expectations, which is enough to trigger a big bounce in the stock off an 11-month low

Best Buy's earnings beat was enough to please investors, who had low expectations ahead of the retailer's quarterly results.

Best Buy's fiscal fourth-quarter report could hardly be seen as strong, but because Wall Street was already expecting weak sales and a downbeat outlook, the results were good enough for its stock.

Shares of the consumer-electronics retailer (BBY) had started March by closing down 0.6% at an 11-month low Monday, following a four-month-long losing streak that saw them tumble 24.6%. Before Tuesday's earnings report, Wedbush analyst Matthew McCartney wrote that, even though expectations were already low - sales appeared set to disappoint - he didn't see much on the horizon that could spark renewed investor interest.

On Tuesday, Best Buy reported sales that missed expectations, including a decline in comparable sales, and provided a full-year outlook that was below current forecasts.

But the company reported fourth-quarter adjusted earnings per share, which excludes nonrecurring items, that rose to $2.61 from $2.58, while analysts surveyed by FactSet were modeling for a decline to $2.46.

And even though the stock already had a relatively high dividend yield, Best Buy lifted its quarterly dividend by 1%.

The stock climbed 7.1% on Tuesday, enough to make it the S&P 500 index's SPX second-biggest gainer. The gains stood out, as it bucked the sharp selloff in the broader stock market, as the S&P 500 sank 0.9%.

Among the positives in the report that CEO Corie Barry pointed to were that market share was at least flat despite the decline in holiday sales, comparable sales for the year returned to growth after three years of declines and the company's advertising business was strong.

Best Buy raised its quarterly dividend by a penny to 96 cents a share. At current stock prices, the new annual dividend rate implies a dividend yield of 5.79%. That is the highest yield among components of the State Street Consumer Discretionary Select Sector SPDR ETF XLY, and nearely five times the implied yield for the S&P 500 of 1.19%.

But overall, the earnings report fell short of even low expectations.

Revenue for the quarter to Jan. 31 declined 1% from a year ago to $13.81 billion, or below the FactSet consensus of $13.87 billion. Comparable sales, or sales in stores open at least 14 months, declined 0.8% versus expectations for a rise of 0.1%.

CEO Barry said on the post-earnings call with analysts, according to a FactSet transcript, that sales were softer than expected in November and early December, but were strong during the second half of December and in early January. Sales then took a bit of a hit during the last week of January, due to weather-related store closures.

Although gaming sales increased from a year ago, they growth was at "a much slower rate than the previous two quarters," Barry said. But the company experienced "strong growth" in emerging categories, such as artificial-intelligence glasses, 3D printers, collectibles and toys.

For the current fiscal year, the company expects revenue of $41.2 billion to $42.1 billion and comparable sales of down 1% to up 1%, while the FactSet consensus is for revenue of $42.2 billion and comparable sales growth of 1.4%.

And Best Buy projects adjusted EPS for the year of $6.30 to $6.60, or below current analyst expectations of $6.63.

Despite Tuesday's rally, Best Buy's stock has still shed 23.6% over the past 12 months, while the SPDR consumer discretionary ETF has gained 6.5% and the S&P 500 has advanced 15.2%.

-Tomi Kilgore

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03-03-26 1652ET