Best Buy: UBS says Q2 print will test durability of stock's recent momentum

UBS has indicated that Best Buy's second-quarter results will serve as a crucial test for the recent positive sentiment surrounding the stock. The investment bank has noted that traders have become more confident in Best Buy's ability to stabilize its core business, leverage a stronger innovation cycle, and drive earnings growth through new profit streams. This has led to a significant increase in expectations for the company.

UBS emphasized that the primary concern now is whether this positive momentum can be sustained amidst increasing challenges. The bank highlighted that the hurdle for a positive stock reaction has become more demanding compared to the first quarter. Best Buy is expected to deliver a healthy quarter despite the complexities introduced by the upcoming Nintendo Switch 2 launch, tax refund benefits, and portions of the Windows refresh cycle.

However, UBS believes that Best Buy is well-positioned to meet these challenges. The investment bank stated that despite the cycling of various product launches, Best Buy should be able to achieve a healthy quarter. The stock has seen a substantial increase in valuation, trading at approximately 13 times next twelve months earnings, compared to around 9 times at the end of the first quarter.

Additionally, the buy-side consensus now expects at least a 3% to 4% comparable store growth, while the sell-side consensus stands at 1.2%.

UBS highlighted that the market's already baked-in expectation of continued momentum means that August commentary could be nearly as important as the actual results. The bank emphasized that investors are looking for low-to-mid-single-digit comparable store growth throughout the month. A modest increase in this range could raise concerns about demand being artificially inflated as consumers stocked up before price hikes took effect.

UBS stressed that the quarter's success will not solely depend on a clean print, but rather on whether investors can support a cleaner multi-quarter earnings trajectory. A modest beat tied to product launches or timing benefits may not receive aggressive support, whereas evidence that core categories are stabilizing and higher-margin revenue streams are scaling could justify the recent multiple re-rating.

The investment bank noted that a diversified demand base, with newer and emerging categories contributing roughly 50 basis points of comparable store growth this year, is likely conservative.

Moreover, innovation in the television sector is expected to play a significant role in driving growth. UBS acknowledged that rising memory and component costs have raised questions about price elasticity, but emphasized that consumers often make purchasing decisions based on budget rather than specific configurations. Best Buy's full-year guidance suggests a modest 1.7% comparable store decline in the second half of the year, assuming second-quarter comparable store growth aligns with UBS's 2.4% forecast.

The bank also pointed to marketplace and advertising as a growing part of the company's bull case, projecting 30 basis points of gross margin expansion this year. UBS believes that clearer commentary on scaling these businesses could further boost confidence in the company's ability to support margins in the coming quarters.