Best Buy Co Inc (BBY) Stock Still a Buy Despite Earnings Call Collapse

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Up more than 50% over the course of the past twelve months and reaching record highs late last week, it goes without saying investors are increasingly convinced Best Buy Co Inc (NYSE: BBY ) really is turning things around in the war against cut-throat competitors like, Inc. (NASDAQ: AMZN ) and bigger retailers like Wal-Mart Stores Inc (NYSE: WMT ). The question is, with only modest sales growth to show for its effort and a still-shrinking bottom line, would Tuesday morning's earnings report justify the heroic rally from BBY stock?

Best Buy BBY Stock

Source: Austin Kirk via Flickr

For a short while the answer was a solid "yes." Soon after the company's earnings call this morning, however, the answer turned into a solid "no."

The early gains of 5% in BBY stock have turned into a loss of 10% in response to a warning from the CEO about something to not expect going forward.

Best Buy Earnings Recap

For the quarter ending in July, electronics and appliance retailer Best Buy earned 69 cents per share on $8.94 billion worth of revenue. The numbers compare to the year-ago top line of $8.53 billion and profit of 57 cents per share.

Perhaps more important, its second quarter numbers compare to expectations for a profit of 63 cents per share of BBY and revenue of $8.66 billion, though in some circles unspoken expectations were for a bottom line of 69 cents per share. Same-store sales were up a solid 5.4%.

CEO Hubert Joly commented on the second-quarter results:

"We are pleased today to report strong top and bottom line growth for the second quarter of fiscal 2018. Our higher-than-expected comparable sales of 5.4% were driven by stronger consumer demand for technology products and by the strong execution of our strategy. Against a backdrop of continued healthy consumer confidence, we believe broad-based product innovation is resonating with consumers and driving higher spend. And, with our effective merchandising and marketing activities, combined with our expert advice and service available online, in-store and in-home - we are garnering an increasing share of those dollars."

The only notable weakness was in tablet sales … a headwind not unique to Best Buy.

It was something Joly said during the conference call, however, that up-ended an otherwise-encouraging rally. He cautioned investors that last quarter's impressive same-store sales growth wasn't the "new normal."

In that same-store sales growth was the foundation for the rally, traders quickly changed their mind about BBY stock.

Winning E-Commerce Formula Finally Discovered, Verified

Still, there were bright spots.

The headwind Best Buy has been, or had been, facing is a well-known one. Like a whole slew of other retailers, it has struggled to keep up with Amazon's low prices and convenience. Best Buy's head-butting with Amazon, however, has been particularly unique.

It's called showrooming … the act of using Best Buy as a place to learn more about certain electronics, and then leaving the store to buy it from another retailer at a lower price point. As part of a comprehensive turnaround effort, Joly has since encouraged price-matching with online competition, which has helped Best Buy win back some of its lost business.

That's not all Best Buy has done to combat the encroachment of though, and some of those other measures have also made a difference.

CFRA analyst Efraim Levy noted before Tuesday's release of Best Buy's Q2 report:

"The company's exclusive brands (such as Insignia, Modal, Dynex) are important parts of sales and profitability too. BBY matches Amazon's prices and those of other key retailers, and encourages consumers to browse and test electronics, including TVs and stereos in-store. We consider Best Buy technical support via its "Geek Squad" to be an advantage, despite the recent planned encroachment by Amazon. Same-store sales were higher in each of the past three fiscal years. BBY grew comparable sales by 1.6% during Q1, including domestic online comparable sales increasing 22.5%."

As it turns out, Levy underestimated the potency of the retailer's e-commerce effort. Online sales grew 31.2% in the second quarter, versus a 23.7% improvement for the same quarter a year earlier.

Looking Ahead for BBY Stock

Prior to the release of the company's second-quarter numbers, analysts were looking for a Q3 profit of 65 cents on revenue of $8.99 billion. Best Buy upped the ante though, raising its revenue guidance to a range of between $9.3 and $9.4 billion … enough to lead to an operating profit of between 75 and 80 cents per share.

Both would up from year-ago levels. In the third quarter of last year, Best Buy turned $8.95 billion worth of sales into earnings of 62 cents per share. Same store sales in the United States are expected to grow between 4.5% and 5.5%, despite Joly's efforts to temper expectations during the earnings conference call. If last quarter's same-store sales growth isn't the new normal, it certainly seems like it's close to the normal for the time being.

For the full year, those same pros are - or were - modeling a bottom line of $3.90 per share of BBY and sales of $40.48 billion, versus last year's revenue of $39.4 billion and profit of $3.56 per share. Best Buy raised its full-year guidance too. It's now looking for revenue growth of around 4.0%, versus analyst expectations of only 2.7%. The company expects operating income to improve between 2% and 6%, year-over-year.

The projected comps benefit from the fact that fiscal 2018 is a 53-week year, though the retailer's organic growth is solid with or without that help.

Whatever the case, it's progress to be sure - the most we've seen in a while. Although Joly cooled the initial bullish jump rather quickly, optimistic guidance and Q2's measurable growth still suggest BBY stock is a compelling turnaround story to tap into.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter .

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The post Best Buy Co Inc (BBY) Stock Still a Buy Despite Earnings Call Collapse appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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