Why Best Buy Shares Are Up 16.5%

Best Buy (BBY 16.25%) stock is finally taking off! After lagging the stock market for much of the past year, shares of Best Buy were up 16.5% by 10:15 a.m. ET after reporting a big earnings miss Thursday morning.

Analysts expect Best Buy to earn just $1.16 per share on sales of just over $9.2 billion. By contrast, Best Buy reported earnings of $1.34 per share and sales of close to $9.3 billion.

Best Buy Q2 Earnings

That’s the good news. Now here’s the bad: Best Buy may have beaten expectations, but its same-store sales were still down 2.3% and total sales were down 3.1% year-over-year. Commenting on sales trends, CEO Corie Barry described consumers as “looking for value and sales events” – which doesn’t sound great for profit margins.

What’s surprising is that despite customer inclinations, Best Buy actually he did improves its margins last quarter, adding 30 basis points to gross profit margins (23.5%) and 50 basis points to operating profit margins (4.1%).

The result: Sales fell slightly, but Best Buy still grew earnings by 7%.

It’s Best Buy stock best buy?

Can Best Buy Continue?

Turning to guidance, management is forecasting a “stabilizing” retail environment — which isn’t as good news as it sounds. Best Buy previously thought sales could fall 3% this year, but they could not decline at all. However, two-thirds into the year, management is now resigned to the fact that sales will fall this year — somewhere between 1.5% and 3%.

That led to a lower projection for full-year sales — now about $41.6 billion.

On the other hand, Best Buy raised guidance for “non-GAAP diluted EPS” (which was equal to actual GAAP earnings in Q2). The company’s forecast of $6.10 to $6.35 in earnings (so about $6.22 in the middle) implies that Best Buy’s stock is selling for about 16.3 times earnings.

Based on analysts’ forecasts of a long-term earnings growth rate of 10.7%, and considering Best Buy’s generous 4.3% dividend yield (so a total yield of 15%), that’s probably enough for making Best Buy stock a “buy.”