BBY put up a headline beat, with comps basically in line, gross margin ahead, as well as SG&A slightly better. The quarter wasn’t great though. Comps down 9.3%, EBIT down 16%. The company is guiding to FY2024 down again, with comps of down 6% to 3% and EPS about 9% below the street or down 13% at the midpoint. The CEO cited continued macro pressure creating volatility in demand and preparing for the consumer electronics industry to be down again. She even detailed the 3-7 year average life of most products BBY sells, but tried to paint some optimism around electronics innovation opportunity. If you think this just conservatism on the guide, recall a year ago the company guided to EPS of $8.85-9.15 ex-items vs street $9.29 with comps down 4% to 1%. EPS finished at $7.08 with comps down 9.9%. BBY was one of the first companies to see discounting return and slowing demand trends. The comp guide this year looks reasonable. The company is planning inventory with expected demand pressure for sure down 14% YY, perhaps that means comps could be worse. We think there could be further margin risk than the company expects on the negative comps. We’d flag that aiding in the gross margin performance this Q was higher profit-sharing revenue from the company’s private label and co-branded credit card arrangement. We think the risk is building in credit income around bad debt from rising delinquencies in consumer credit cards and reduced balances from charge offs. Taking a step back, the margins here are likely to see levels below pre-pandemic as the ecommerce penetration vs 2019 is about 50% higher ( from 20% to 30%). Beyond the normal incremental costs of ecommerce there is much lower attachment of warranty and credit revenue when transactions are done online. This is why the company has moved toward trying to sell warrantee and tech service as a membership vs an add on to transactions. So far it doesn’t appear to be working. The bottom end of EPS also looks plausible to us as that is about where our model is coming out. Does the market really want to put a low to mid-teens PE on a ~3.5% margin B&M retailer with a challenged consumer environment? We think this is another stock that has to grind lower near term, still 30% downside. Best Idea Short.
