Best Buy Maintains Long-Term Targets Amid Market Volatility; Shares Look Meaningfully Undervalued

Narrow-moat Best Buy reported slightly soft results, with sales of $10.65 billion and EPS of $1.49 narrowly missing our $11.1 billion and $1.60 estimates, respectively. The firm saw 140 basis points of gross margin pressure from a year ago (to 21.9%, from 23.3%) from investments in its Totaltech loyalty program (100 basis points), elevated promotional activity, and higher-than-expected freight and component costs. While management lowered its sales and EPS forecasts for the balance of the year (down 2.2% and 3.3%, respectively, at the midpoints), we're encouraged by the relative resilience of the consumer electronics retailer amid a backdrop of higher fuel and food costs, weaker consumer sentiment, and general trepidation across the consumer cyclical space. We continue to believe that the firm's Totaltech and Health Investments figure to unlock mid-single-digit average annual sales growth in fiscal 2024 and 2025, while the higher-margin health segment, an elevated digital mix, and growing advertising business render the firm's 6.2%-6.8% non-GAAP operating margin target readily attainable, a view that the market seems to be discounting. Shares have fallen some 35% over the past six months, well below even their January 2020 (prepandemic) levels, and look materially undervalued, trading at a 40%-45% discount to our $126 fair value estimate—which we don't expect to meaningfully change after digesting results.