Best Buy Co., Inc. (BBY), in Richfield, Minn., retails technology products in the United States and Canada. The shares of the electronics retailer have gained 11.2% in price year-to-date. However, the stock fell sharply last week despite the company posting its fiscal third-quarter earnings, which topped estimates and raised its sales outlook for its fiscal 2022. Over the past five days, the stock slumped 4.9% in price to close yesterday’s trading session at $110.95.

The share price retreat was likely due to the company reporting a decline in its gross margin. Its gross margin in the third quarter was 23.5% versus 23.6% a year earlier. The decline can be mainly attributed to stepped-up promotional activity and a drag from a new membership program. The company also cited more organized retail crime at its stores, which is negatively affecting its financials. “We are definitely seeing more and more particularly organized retail crime and incidents of shrink in our locations,” said Best Buy CEO Corie Barry.

However, with analysts expecting increased consumer spending in the holiday season, BBY should benefit. The company expects to generate revenue within the range of $16.4 billion - $16.9 billion in its fiscal fourth quarter. Ethan Chernofsky, vice president of marketing at Placer.ai, a foot traffic analytics company, expects BBY to witness significant growth in offline sales in this holiday season. Moreover, improving its retail context and “the brand’s creative approaches to problem-solving” should enable the company to garner substantial gains over the holiday period. "We are looking forward to a strong holiday season and believe we are extremely well-positioned with both the tech customers want and fast and convenient ways to get it," said Matt Bilunas, Best Buy CFO.

Here is what could shape BBY’s performance in the near term:

BBY Looks undervalued at its Current Price level

In terms of forward P/E, BBY is currently trading at 11.07x, which is 31.8% lower than the 16.22x industry average. Also, its 0.55x forward EV/Sales is 61.5% lower than the 1.43 industry average. Also, BBY’s forward EV/EBITDA and Price/Sales ratio of 7.12 and 0.52, respectively, is 31.2% and 56.3% lower than the industry averages.

Solid Third-Quarter Earnings Report

BBY’s revenues and gross profit increased marginally year-over-year to $11.91 billion and $2.80 billion, respectively, in its fiscal third quarter, ended October 30. Its operating income stood at $670 million, up 19.4% from the same period last year. And its net earnings grew 27.6% from its year-ago value to $499 million. The company’s non-GAAP EPS came in at $2.08, versus a $1.91 consensus estimate, reflecting an 8.9% earnings surprise.

POWR Ratings Reflect Growth Prospects

BBY has an overall B rating, which translates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of B for Value, which is consistent with its lower-than-industry valuation multiples.

BBY also has a B grade for Quality. This is justified because the company’s 63.22%, 13.15%, and 23.99% respective ROE, ROA, and ROTC are 266%, 116%, and 207.2% higher than the industry averages.

Of the 44 stocks in the Specialty Retailers industry, BBY is ranked #11.

Beyond what I have stated above, one can also view BBY’s grades for Sentiment, Growth, Momentum, and Stability here.

View the top-rated stocks in the B-rated Specialty Retailers industry here.

Bottom Line

The company recently reported an increase in theft in its stores, hampering its margins. The decline in its gross margin and concerns about organized retail crime affecting its financials have overshadowed the stable rise in its bottom line. However, analysts expect the company to witness a robust holiday period with increased in-person sales. Moreover, Wall Street analysts see a more than 20% upside potential. Also, given its significantly high ROE, we think it could be profitable to buy the dip in BBY.

How Does Best Buy Co., Inc. (BBY) Stack Up Against its Peers?

BBY has an overall POWR Rating of B. However, one could also check out these other stocks within the Specialty Retailers industry with an A (Strong Buy) rating: Destination XL Group, Inc. (DXLG), The Tile Shop Holdings, Inc. (TTSH), and Conn's, Inc. (CONN).

Note that DXLG is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Stocks Under $10 portfolio. Learn more here.

Note that CONN is one of the few stocks handpicked by our Chief Value Strategist, David Cohne, currently in the POWR Value portfolio. Learn more here.

BBY shares were trading at $106.74 per share on Tuesday morning, down $4.21 (-3.79%). Year-to-date, BBY has gained 8.98%, versus a 23.71% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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