Maintaining Best Buy FVE Despite Sell-Off

Narrow-moat Best Buy BBY reported strong fiscal 2022 third-quarter results, with 2% comparable sales growth year over year healthily exceeding guidance of negative 3%-0% and driving impressive 25% growth on a two-year stack, with elevated sales levels looking increasingly sticky. Inventory was up 13% from prepandemic levels despite procurement concerns, broadly in line with fourth-quarter stacked comparable growth guidance of 12% at the midpoint, corroborating our view that the largest retailers that are able to dip, dive, dodge and duck around tangled supply chains with chartered or alternative transit methods should be adequately stocked to benefit from strong holiday spending. Progress in the firm's Totaltech loyalty program and the sustained demand-generative capability of service offerings leave us confident in our expectations for 3.5% long-term sales growth, while fulfillment improvements and an elevated (long-term margin-accretive) e-commerce mix should prove sufficient to defend 5.5% and 5.3% operating margins through 2025 and 2030, in our view. After accounting for the time value of money, the tuck-in acquisitions of Current Health and Yardbird, and a slight hike in full-year guidance, we expect to maintain our $116 fair value estimate. The shares are trading in a range we consider fairly valued after a midteens percentage postprint drop.

The big story for the next few quarters will be the progress of the Totaltech loyalty program rollout, which boasted 3.1 million members at the end of the second quarter (undisclosed in the third) and continues to drive better frequency and higher spending when compared with nonmember cohorts. As the company rationally embraces a service-intensive vision of the future, we expect the program to represent the key impetus for increasing spending per active customer and the clearest vector for defending or expanding wallet share over time in a category that sees more than half of its sales fulfilled through online channels.

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