To The Moon

$Best Buy(BBY)$ plunged 13% after its earnings report, which honestly didn't look too bad, but because of the decline in same-store sales, it will have investors combining that with the previous weaker-than-expected guidance from $Wal-Mart(WMT)$ that retail sales are sluggish and recession risks areincrease. $Target(TGT)$

Takeaways

• Tariff uncertainty: China/Mexico tariffs are the biggest risk variable, initially estimated to drag sales by 1% (if maintained at 10%), but management emphasizes flexibility (SKU adjustment/supplier negotiation).

• New business layout: Marketplace (SKU expansion) and Ads (agency cooperation) are future profit engines, FY26 investment period, but is expected to improve margins in the medium to long term.

• Revenue differentiation: computing/gaming share increase (differentiated services + new product cycle), home appliances still weak (industry promotion + housing market downturn).

• Cost impact: inflation offset by AI customer service/procurement system optimization, FY26 capex $700-750M (flat y/y)

• Health Business Impairment: $475M Best Buy Health Impairment (less long term growth than expected), but maintains home healthcare strategy.

Performance and market feedback

• Performance

  • FY25 results: revenue 14B (+0.52.58 (-5% YoY); operating margin 4.9% (-10bps).

  • FY26 guidance: revenue 41.4-42.2B (same store 0-26.20-6.60 (+140-156% YoY); operating margin 4.2-4.4%.

• Comparable sales: same-store -0.5% YoY, higher than the company's estimate of -3%; including domestic US comparable sales of +0.2%;

• Market reaction: despite the earnings beat, Best Buy shares fell 13.3% after the release, likely due to concerns about future growth

Investment highlights

1. Tariff Impact

   • Impact of 10% China or Mexico tariffs (or rising to 20%) on sales and EPS: would drag full year comparable sales by ~1% (mainly impacting Q2-Q4) and EPS impact of ~$0.20. Mexico tariffs, if implemented (20% of purchases), could impact private label TVs and appliances.

   • Supply chain flexibility and collaboration with suppliers will mitigate the impact, and current guidance does not include tariff variables

2. Sales momentum and share

   1. Q4 comparable sales +0.5%, flat share in the industry

   2. Full year share gains in computing/gaming category (game console share at 30-year high), but appliances/home theater under pressure

   3. FY26 is expected to see continued growth in computing (Win10 upgrades + AI capabilities) and a narrowing decline in appliances.New Switch and GTA6's pull on FY26 sales is expected to be more pronounced in H2 growth

3. Margin improvement

   1. U.S. domestic online sales increased 2.6% year-over-year, with progress in digital transformation favoring margins;

   2. The Company's gross margin increased 40bps to 20.9%, driven by improvements in the services category;

   3. FY26 gross margin guidance (flat to +20bps) is driven by services (membership) and advertising business support, with flat and slightly lower product margins. flat SG&A (efficiency optimizations offsetting new business investments)

   4. Cost discipline: inflation offset by AI customer service/procurement system optimization, FY26 capex of $700-750M (flat y/y), dividend upgraded for 12th consecutive year (+10.95/share dividend).

4. New Strategy Execution

   1. The company's Omni-Channel strategy and new profit streams such as Best Buy Marketplace and advertising will be key to future success;

   2. U.S. Marketplace will be more focused on new product SKUs (not refurbished) and is expected to go live mid-year, with limited initial contribution but long-term margin and share enhancement. best Buy Ads has signed up a large ad agency and is expected to grow revenues over the next few years, but will require resources (e.g., New York office).