Best Buy's (BBY) stock has notched an astounding 28% gain since the summer months, but the path toward further stellar gains may not be as easy.
Shares of the electronics retailer have soared since Aug. 22, the day before the company defied its Wall Street critics by blowing away second quarter sales and earnings estimates. That surprising outcome -- which sent the stock booming some 19.5% on Aug. 23 -- was fueled by a solid quarter of sales by Best Buy online and within categories such as appliances, consumer electronics and mobile phones. As icing on the cake, Best Buy reiterated its full year sales outlook and raised its operating income estimate to low-single digit growth from flat.
Meanwhile, CEO Hubert Joly -- who unfortunately for his bank account sold $12.8 million of the shares ahead of the report -- struck an upbeat note on the retailer's prospects for the balance of 2016. Joly sold when the stock was at about $32.24; today it's at $40.45.
Now, however, Best Buy enters its third quarter earnings release on Thursday in an interesting state. For starters, Best Buy's stock is valued more aggressively in light of its healthy year-to-date performance. As a result, Wall Street may not be in too much of a hurry to send the stock significantly higher, especially in front of the ultra-competitive holiday season, even if the company trounces earnings estimates again. Best Buy's stock currently trades on a forward price-to-earnings multiple of about 13 times, above the five-year median of roughly 12 times, according to data from BTIG.
"We believe that the setup for Best Buy is more difficult this quarter, as expectations are higher," said Credit Suisse analyst Seth Sigman. "Our data, combined with Best Buy's continued market share gains suggests there may be modest upside to the company's third quarter same-store sales, but the market has assumed that, and we still see some questions about lapping a strong fourth quarter last year."
There are some significant question marks surrounding Best Buy's holiday season potential referred to by Sigman and others.
One chief concern is how effectively Best Buy will compete during the holidays with discounters such as Walmart (WMT) and Target (TGT) in the electronics and home theater categories. Each big box retailer has made efforts of late to increase the number of popular high-definition televisions and related accessories they sell, while also stepping up their discounting. They have also moved to improve their overall assortments in electronics and bolster customer service, most notably at Target.
"Given strong price compression and new competition from the discount channel, we think risk is higher for a sales and or margin miss [for Best Buy] in this category [home theater] over the next year," said Jefferies analyst Dan Binder, who estimates home theater sales make up about 20 percent of Best Buy's consumer electronics business. "The discounters are particularly aggressive during the holidays, so that would probably be where much of the risk lies near-term."
Best Buy will likely be weighed down during the holidays by sluggish video game sales, and may see a hit to its appliance business from an aggressive entry into the category by mall-based J.C. Penney (JCP) , Sigman said.
But hey, perhaps all things Apple (AAPL) will help save the holidays for Best Buy and ensure its stock rips higher into 2017. Only Santa knows for sure.