BBY slides 7% as reliance on promotional activity weighs on margins

Best Buy (BBY) reported mixed Q3 FY25 results, with adjusted EPS of $1.26 falling short of the $1.29 consensus estimate and revenue of $9.45 billion missing expectations of $9.63 billion, reflecting a year-over-year decline of 3.2%. Comparable sales declined 2.9%, worse than the expected 0.92% drop. Domestic comparable sales fell 2.8%, while international comparable sales dropped 3.7%. Key product categories such as U.S. entertainment (-18.8%) and appliances (-14.7%) saw significant declines, partially offset by growth in computing and mobile phone sales (+3.8%).

The gross margin improved to 23.5%, beating estimates of 23.1%, driven by stronger financial performance in Best Buy's services category, including its membership offerings. However, higher SG&A expenses, up slightly year-over-year, weighed on profitability. Domestic SG&A was $1.72 billion, or 19.7% of revenue, compared to 19.2% last year. International SG&A expenses also increased, attributed to new Best Buy Express locations in Canada.

Best Buy adjusted its FY25 guidance downward, now expecting annual comparable sales to decline between 2.5% and 3.5%, compared to its prior forecast of a 1.5% to 3% decline. Revenue guidance was trimmed to $41.1-$41.5 billion from $41.3-$41.9 billion, while the non-GAAP EPS range was revised to $6.10-$6.25 from $6.10-$6.35. The retailer anticipates Q4 comparable sales will range from flat to down 3%, reflecting cautious expectations for the holiday season.

The company attributed weaker-than-expected performance to steeper declines in demand between promotional events, compounded by macroeconomic uncertainty and inflationary pressures. CEO Corie Barry noted that while customers responded well to sales events, demand outside of these periods remained challenging. Best Buy’s early start to holiday promotions, including its “Doorbusters” event and earlier Black Friday deals, highlights its efforts to counter consumer caution.

Despite challenges, Best Buy’s management expressed optimism about stabilization in the electronics industry, citing improving customer demand in early Q4. The retailer has rolled out scheduled parcel delivery in parts of the U.S. to enhance its fulfillment options, signaling an ongoing focus on operational improvements. However, the reliance on promotions and a shorter holiday shopping season could create an uneven sales environment.

The stock fell as much as 9% in early trading before paring some losses, as the guidance cut and softer-than-expected results raised concerns about holiday performance. Analysts pointed to customer hesitation in purchasing big-ticket items like home theaters and appliances as a key headwind. However, improvements in gross margin and the potential for stabilization in demand offer some positives for the longer term.

In summary, Best Buy’s Q3 results underscore the pressures facing consumer electronics retailers in a promotional-heavy environment. While the company remains well-positioned for the holiday season with compelling deals and improved services, cautious customer spending and reliance on sales events remain challenges. Investors will closely watch the effectiveness of its holiday strategy and the trajectory of customer demand through Q4.