Best Buy shares rose on Thursday as management explained that an AI upgrade cycle for computers and personal devices has begun to unfold. The company's revenue in the first quarter of fiscal 2025 fell 6.5% year over year to $8.85 billion in the three months ended May 4, falling short of the $8.96 billion that analysts had expected, according to estimates compiled by LSEG. Adjusted earnings per share of $1.20 rose 5.3% year over year and beat the $1.08 that analysts had expected, LSEG data showed. BBY's YTD gain of nearly 13% for Best Buy stock was related to what was said on the post-earnings conference call about how consumers will want the latest and greatest AI features on their computers and smartphones. Which means more stores, more online traffic and more sales for the electronics retailer. Bottom line: This was a better quarter than feared for Best Buy. Although sales fell short of target, both domestically and abroad, the company is operating more efficiently than the Street expected as profitability results were better than expected. Same store sales came up short. But management said on the call that “gains in services and laptops” helped offset struggling categories like hardware. The services, which include membership offerings, helped boost the company's gross margin performance. Services are an area that Best Buy can lean on and leverage to differentiate itself from online retailers like Amazon. While Amazon can compete on prices and offers, it doesn't have brick-and-mortar locations like Best Buy, which makes it difficult to compete in terms of the personalized customer experience, product setup, or tech support side of things. That's not to say Best Buy is sitting still in the e-commerce space, the company is making progress with its omnichannel experience, with CEO Corey Barry saying on the call that “the fulfillment experience continues to improve, with nearly 60% of our packages delivered.” Or available for pickup within one day, 40% of our digital sales are picked up in stores by our customers, with more than 90% of these orders available within just 30 minutes. Best Buy Why we own: We've taken a position in Best Buy because we believe it will prove to be a preferred destination for consumers looking to upgrade devices, many of which were purchased during Covid, to new AI-powered devices. Life cycles for computers and mobile devices tend to be around four years, which is how far we are from the beginning of the pandemic when everyone was building their home offices. In the meantime, we're happy to be patient while the thesis plays out thanks to its roughly 5% annual dividend yield. Competition: Target, Walmart, Amazon, Costco Last purchase: April 30, 2024 Start: March 27, 2024 Consumer health remains a key element to monitor and that's not unique to Best Buy. “Macro factors continue to fluctuate and put pressure on consumer spending,” Barry said. She goes on to say, “Consumers continue to make difficult choices regarding their budgets, trading up in some areas while still prioritizing spending in others such as services and experiences such as travel. This, combined with technology purchases being pushed back into the early years of the pandemic and lower levels of innovation.” Materials, to continued decline in demand for higher-priced consumer electronics and a focus on value and deals for existing buyers. With that in mind, the team is still looking for new ways to enhance the customer experience and Best Buy's CEO remains confident that key categories will return to growth. It cited technology innovation, such as artificial intelligence-enabled computers, as a key driver. Computers and mobile phones accounted for 44% of Best Buy's domestic sales in the quarter — 50% of international sales — making it the company's largest and most important category Computing is benefiting as the year progresses, thanks to hardware replacements and AI-driven upgrades. We of course agree with this sentiment, especially since we are now more than four years removed from the start of the Covid pandemic, a time when many people were building their home offices. Personal computers and mobile phones tend to have a life cycle of about four years. While some may look to expand this, the temptation and justification to upgrade will be easier this time around, thanks to the increased capabilities of machines that have been designed with AI in mind. “We saw early signs of improvement as year-over-year comparable laptop sales became slightly positive in the fourth quarter, and this trend continued in the first quarter,” Barry said. More importantly, it noted that Best Buy will not only have the largest assortment of AI-enabled computers, but more than 40% of that assortment will be exclusive to Best Buy. Returning to how Best Buy can compete with the likes of Amazon, Best Buy is working closely with sellers on marketing strategies and demos to deliver an “educational, relatable and unique digital shopping journey.” In another sign of how more powerful devices can drive traffic, Barry said Apple's new M4-equipped iPads are “already contributing to improving sales trends this quarter.” Although the reported results have been mixed, they are a combination of better-than-expected profitability and signs that a major computing upgrade cycle, spurred by AI-equipped devices coming to market, is on the horizon as we progress through the year. We believe our fundamental investment thesis is sound and therefore reiterate our Buy 1 rating and $95 price target on the stock. Guidance For fiscal year 2025, management said it expects to see sequential improvements in same-store sales results and trend toward the middle of the target range. However, the team believes that even in the middle of same-store sales forecasts, they can deliver an adjusted operating profit result towards the high end of the target range, thanks to higher gross margins on membership and service offerings. However, full-year guidance remained unchanged. Revenue ranged from $41.3 billion to $42.6 billion, slightly above estimates of $41.94 billion, at the midpoint, according to FactSet. Same-store sales fell 3% to a flat level, exactly in line with expectations. Adjusted operating margin is between 3.9% and 4.1%, which is also in line with the consensus estimate of 4%. Adjusted earnings are between $5.75 and $6.20 per share, just below the per-share estimate of $6.04 at the midpoint. (Jim Cramer's Charitable Trust is long BBY, AMZN. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you'll receive a trade alert before Jim takes a trade. 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Bimal Tandel photographs Bhavin Tandel and Dinesh Tandel, crew members of the ship Clara Oldendorf, in front of a Best Buy store in Timonium, Maryland, US, March 29, 2024.
Julia Nickinson | Reuters
shares Best buy It emerged on Thursday as management explained that the AI upgrade cycle for computers and personal devices has begun to roll out.
