As most retail - and a sizeable wholesale population - businesses struggled for years to compete against the goliath of industry, Amazon.com (NASDAQ: AMZN), a cleansing of inefficiencies and a spark of innovations has been taking over management conversations at the remaining operators. One resilient name in the industry, which continues to battle successfully against the 'race to zero,' is Best Buy (NYSE: BBY). Shares of Best Buy are rallying by as much as 5.8% in the pre-market hours of Thursday morning; bulls are advancing the price aggressively amid the company's results for the first quarter of 2023.

Despite starting its press release with disappointing figures, Best Buy's shareholders are within their right to look at the big picture and the long-term potential the company is building momentum towards. As a widely followed vital performance indicator (KPI) for the retail industry, comparable sales growth rates - or declines - can prompt significant reward or punishment by analysts and investors alike. Unfortunately, Best Buy's similar sales were not the best; they are somewhat worrisome. However, management is riding on an innovation momentum wave that led them to provide markets with enough optimism to look forward to by the end of 2023. 

Cyclical Slowdown or Efficient Restructure

Comparable sales at Best Buy posted a decline of 10.1% for the thirteen weeks. A double-digit decline comes coupled with a similar high single-digit inflation rate in the United States, so on a real rate basis, the earning power in the company's top line declined by high double-digits. The bulk of the contraction comes from the company's second-largest segment in domestic sales, which brought in $8.8 billion in revenue to be 12.1% lower than volumes last year. In addition, the most significant part seen in enterprise sales, which generated $9.4 billion in revenue, also posted a 10.1% decline in comparable sales. However, despite massive declines in sales and volumes, management control in supply chains and inventories enabled the gross margin to receive a 60 basis point boost, going from 22.1% in 2022 to the end of the first quarter of 2023 at 22.7%.

Best Buy's capacity utilization decreased from 69% in 2022 to 64% in 2023, this rate being a proxy for demand and supply dynamics within the business. Considering this is also a decline from the fourth quarter 2022' reading of 67%, it is safe for investors to assume that demand is significantly withdrawn from the space, especially after accounting for inventory level declines, when management decides to reduce the level of inventories it is typically seen as a sign of even lower demand expectations to be realized in the coming months. Taking inventory levels and sales contractions as a standalone data point can bring on indefinite negative assumptions; investors can now offset these negatives by looking at the bigger picture. 

As digital revenue now represents nearly a third of total company revenue, a proper explanation of inventory and capacity utilization reduction may be sensible. As management now dedicates a significant portion of capital expenditures to E-commerce and information technology ($540 million as of fourth quarter 2022) and store-related projects ($355 million as of fourth quarter 2022), Best Buy's comeback may be closer than bears would like to think.

The Big Picture

Best Buy's analyst ratings point to a 14% upside from today's prices. However, other viewpoints may suggest these targets be on the more conservative side of things. For example, management has announced a further share buyback program, repurchasing nearly ten million shares from the open market, returning a total value of $79 million to shareholders. What is more critical for investors trying to figure out how undervalued this company may be is that the board of directors has also approved a $0.92 quarterly dividend to be paid on July 6, 2023. This updated dividend is a 4.5% increase from the previous quarterly payout of $0.88 per share, nearly keeping up with the national inflation rate. 

Best Buy's dividend yield can set the foundation for an initial acquisition range that investors can hover over. Historically, the highest yield BBY stock has paid is 6.0% when the stock sold off in 2013 to its low of $11.20 per share. This $0.92 quarterly dividend would translate to an annualized yield of 5.22% within the $70-$71 per share price range. This matters because the dividend yield and payout history can act as a valuation proxy, just as a home's rental income relative to its selling price can give both renters and buyers a hint into the house's actual value.