Best Buy stock rises despite sales miss, Dollar Tree declines

Loop Capital Markets Managing Director Anthony Chukumba joins Yahoo Finance Live to examine the retail environment as chains Best Buy and Dollar Tree report earnings.

Video Transcript

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- Shares of Best Buy are on the rise this morning. Despite missing sales estimates and forecasting, weaker consumer spending to come this year on electronics. Anthony Chukumba, Loop Capital Markets Managing Director, joins us now for analysis.

So Anthony, let's get right into Best Buy first. And we do also want to talk Dollar Tree, but let's start with Best Buy today. What's your initial take of the results?

ANTHONY CHUKUMBA: My initial take was that these are certainly less bad than feared. I mean, look-- I mean, comparable store sales did decline at 10% so that's not great. But operating margins were a little bit better than we expected. Our earnings were a little bit better than we expected. And management reiterated their guidance for the full year.

In addition to that, they did say that comp store sales trends improved sequentially so far in the second quarter. And they did say that they expect this year to be sort of a bottom in terms of consumer electronics demand. So there were certainly some positive things that we heard as well.

- Hey, Anthony. It's Julie here. I also saw inventories, I think, were down about a 16%. So an improvement there like we've seen from a lot of the other retailers. Does that mean also that Best Buy is not necessarily having to slash prices as much and offer as many discounts as it did before to try and clear the stuff it wasn't selling out of there?

ANTHONY CHUKUMBA: You're 100% right. I mean, they've kept their inventory levels very, very lean. They didn't necessarily have the inventory problem that we saw from a lot of retailers in 2022. And so that's certainly a positive. I mean, the last thing you want to have when demand is softening is too much inventory. Because inventory is not like wine, it does not get better with age.

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- Anthony, so you all do a price comparison of Best Buy compared to Amazon. Does Best Buy-- are they nailing pricing now? Or do they need to work on that more? They are 100% nailing pricing and they've been doing that for quite some time. So what we have found for the last several years, quite frankly, is that they're pretty much at price parity with Amazon. But occasionally, you'll find some small differences here and there but nothing material.

In addition to that, Best Buy world price match Amazon. And a number of their other large competitors, by the way, at the point of sale, you know, no questions asked. I've actually done it several times. So they are not allowing Amazon or anyone for that matter to undercut them on price.

- Anthony, let's switch on over to Dollar Tree here. Because this is an interesting one, right? There was this assumption going in that they would benefit from a trade down effect. It seems like maybe they did. But people are buying a lot of food items which are lower margin for them. Is there anything that can be doing to managing around the situation here that you think that they're not?

ANTHONY CHUKUMBA: Yeah, that's a good question. I mean, look, in terms of the mix as you mentioned, consumables which are lower margin. There's not a whole heck of a lot they can do about that. Now the one other thing that really impacted them that was a real surprise was shrink.

I mean, look, a lot of retailers have been talking about shrink and how shrink has increased. They hadn't been as vocal about that. And that is something that they can and, I think, will do more to control going forward. In terms of that mix shift, not a whole heck of a lot they can do.

And quite frankly, look, I was very encouraged by the comparable store sales increases in both Dollar Tree to remember with anniversary that price increase from $1 to $1.25. So the fact, they can comp positively on top of that, it's very encouraging. And then Family Dollar, which has been the redheaded stepchild of problem child. We saw comps up almost 7%. So clearly the investments that they're making are working and Family Dollar.

- So, wow, in Family Dollar fine. But going back to Dollar Tree, again, the stock taking a big hit today. Numbers were worse than expected. And again, yes, they talked about shrink. But what went wrong here? I mean, you would think that Dollar Tree would hold up strong in the face of an inflationary environment. What stood out to you as to what went wrong?

ANTHONY CHUKUMBA: Yeah, well let's just clarify. Family Dollar is owned by Dollar Tree, so it's the same company. But Yeah, I mean, look, I think that there's clearly an expectation that with mantle ridge having taken control of the board last year with Rick drilling who executed the amazing multi-year turnaround at Dollar General that would be further ahead in the turnaround right that we would see much better. Not only top line results but profitability results. And we haven't seen it. Now we have seen the top line improve and that is very, very encouraging. But profitability continues to be pressured. And I think that there are probably some investors that are losing faith, that are wondering if rich best days are behind them.

And quite frankly, I think that's a legitimate the concern given the numbers that we've seen. Now my response to that is that look, I mean turnarounds, they can be lumpy. It's just not always kind of straightened to upward or to the right. And I think that we need to give Rick and the team more time, quite frankly.

- Anthony, you have a pretty big coverage universe. And it's a lot of different diverse retailers from Staples like Dollar Tree, too more discretionary like a Best Buy, also Williams-Sonoma Dick's on the list. Two questions for you on that general front. Firstly, on the issue of shrink, how big of a problem is this for the broader retail industry right now? And how are they getting their hands around it?

ANTHONY CHUKUMBA: Yeah, great question. So it's interesting-- we actually hosted a call with a long-time bush shrink expert early this year. And it's a problem. There's no question about that. And it's impacting a lot of retails. We're seeing a lot of retailers talking about increased shrink. Now, there are some things that retailers can do about shrink.

So for example, you can see them put more items behind fixturing where you simply have to call someone over to open up the item, that's not great from a customer experience perspective that can certainly work. You might see them add security guards into the stores. Dollar Tree was talking about in Family Dollar they might even selectively raise prices in areas with high shrink but to some extent there's not it's very limited in terms of what you can do.

I mean, a lot of it is going to 16 to come down to local. Governments. You know, enforcing sort of shoplifting laws and cracking down on shoplifters and organized retail crime. And we're just not seeing that.

- Yeah, and definitely not, obviously. It seems like it's still just this big problem for them. And then just more generally, too, about consumer spending right now-- I mean, as I know, not everybody in your coverage has reported as of yet. But, from what we've seen thus far, what is distinguishing those that are doing well and those that are doing not as doing as well in this sort of more choosy customer environment?

ANTHONY CHUKUMBA: So I mean certainly, what we're seeing is that retailers that sell more kind of consumable items, right, think food, health and beauty care items cleaning supplies essentially necessities are generally doing better than retailers are selling discretionary items particularly high ticket discretionary items and a lot of that has to do with these macroeconomic headwinds and it's still very, very uncertain.

In addition to that, remember we had two years of pandemic, driven demand pull forwards in a lot of those high ticket discretionary items. But having said that it, it's very kind of company-specific right so you had Foot Locker and their horrific blow up last week. But then you had Dick's Sporting Goods who I covered and they had a perfectly fine first quarter.

So in the retail industry, I say it's pretty much always a stock picker's market. You just have to kind roll up your sleeves and do the work. Because while the rising tide does lift and lower all boats, a lot of it has to do with company specific situations and strategies and management teams.

- All right, we will have to leave it there, Anthony Chukumba. Although I do want to hear your forecast, because I know you made one in 2022 about Bed Bath Beyond that came to pass but we'll have to wait for the forecast of whose-- what nail in the coffin is coming. Our thanks to you as usual, Anthony Chukumba, Loop Capital Markets Managing director.