Executive Summary / Key Takeaways

• Best Buy is strategically positioning itself as the leading omnichannel destination for technology, leveraging its unique blend of tech expertise, human touch, and services like Geek Squad to differentiate in a competitive market.
• Despite recent revenue declines driven by macroeconomic pressures and a post-pandemic normalization, the company demonstrated resilience in Q1 FY26 by delivering better-than-expected profitability and maintaining its adjusted operating income rate year-over-year, primarily through expense management and services performance.
• Key growth drivers are expected from replacement/upgrade cycles in computing (bolstered by Windows 10 end-of-support and AI features), mobile phones (supported by enhanced carrier partnerships), and gaming (driven by new launches like Switch 2), alongside the scaling of new profit streams like the US Marketplace and Best Buy Ads.
• The evolving tariff environment presents a significant uncertainty, impacting supply chains and potentially consumer prices, leading to a cautious update to FY26 guidance, though management is actively pursuing mitigation efforts with vendors.
• Best Buy's disciplined capital allocation strategy, including a commitment to being a premium dividend payer and executing share repurchases, underscores its focus on returning value to shareholders while investing for future growth.

Setting the Stage: Best Buy's Evolving Role in the Tech Landscape

Best Buy Co., Inc. stands as a prominent figure in the consumer electronics retail landscape, driven by a purpose to enrich lives through technology and a vision to personalize and humanize tech solutions for every stage of life. The company operates through a distinct omnichannel model, combining a robust online presence with a network of physical stores and in-home services, aiming to meet customer needs wherever and however they choose to shop. This approach, leveraging a blend of tech expertise and human interaction, forms the core of its value proposition.

The company's journey reflects a history of adapting to market shifts. From its early foray into the music business in the 1990s, which significantly disrupted traditional record stores before Best Buy itself exited the segment, to navigating the unprecedented surge in demand during the COVID-19 pandemic, Best Buy has consistently evolved. The pandemic era, marked by a structural shift towards digital channels, prompted adjustments to its operating model, including changes to store staffing and the development of a more flexible workforce. However, the period following the pandemic has seen Best Buy face a "stacked layer of pressures," including persistent inflation impacting consumer budgets, increased spending on experiences over goods, a stagnant housing market affecting appliance sales, and a normalization after the pandemic pull-forward. These factors, coupled with a perceived lack of significant innovation in certain categories, contributed to revenue declines over the past three years.

In response, Best Buy has sharpened its strategic focus, prioritizing omnichannel experience enhancements, driving operational effectiveness, maintaining disciplined capital allocation, and cultivating new revenue streams. These priorities are designed not only to navigate the current uneven environment but also to position the company for renewed growth and profitability expansion as the industry stabilizes and new technology cycles emerge.

The Engine of Evolution: Technology and Operational Excellence

At the heart of Best Buy's strategy is the intelligent application of technology, not just in the products it sells, but in how it operates and serves customers. While Best Buy doesn't manufacture core technological components like semiconductors, its differentiation lies in leveraging technology to enhance the customer journey and drive operational efficiency across its complex omnichannel model.

A key area of technological focus is the digital experience. Recognizing that nearly a third of domestic revenue is transacted online and a majority of customers interact with digital assets, Best Buy is investing heavily in its online platforms. A significant initiative is the planned launch of an innovative, AI-powered search experience across its website and app later this year. This technology aims to guide customers with AI-powered prompts, enable natural conversational filtering for easier product discovery, and provide fewer, higher-quality matches with richer product information. The stated goal is to help customers solve real problems and make confident buying decisions. Early results from personalized app experiences have shown increased engagement, with customers receiving personalized homepages engaging with content, products, and tools significantly more than those who didn't.

Operational technology is also a critical differentiator. In customer care, the company has implemented new conversational AI technology and upgraded IVR systems. These advancements have led to tangible, quantifiable benefits: a decrease in the cost per customer contact by more than 20% over the last three years, record low levels of call transfer rates, and record-high customer satisfaction in Q1 FY26. Similarly, in supply chain operations, a shift from rule-based shipping to a data-driven sourcing solution using real-time cost data has improved efficiency, enabling more on-time deliveries and reducing shipping costs. The company also leverages AI for in-home delivery and installation routing, improving efficiency and enabling customer-facing features like live tracking, which has seen high engagement and positive feedback.

Furthermore, Best Buy is exploring and integrating emerging technologies into its offerings and customer experiences. This includes enhancing in-store displays for wearable AI products like Ray-Ban Meta glasses and preparing for launches that leverage AI features in computing and mobile devices. The company also utilizes GenAI for internal tech development, aiming to enhance overall effectiveness.

For investors, the "so what" of these technological efforts is clear: they are foundational to enhancing the customer experience, driving operational efficiencies that can support profitability even in a challenging sales environment, and strengthening the company's competitive moat. By leveraging AI and data analytics, Best Buy aims to reduce costs, improve service levels, and make its platforms more engaging and effective, contributing to both margin preservation and potential future growth.

Financial Performance and Operational Resilience

Best Buy's recent financial performance reflects the ongoing pressures in the consumer electronics market, yet highlights the company's focus on operational execution and profitability management. In the first quarter of fiscal 2026, revenue totaled $8.77 billion, a slight decrease of 0.9% compared to $8.85 billion in the prior year period. Enterprise comparable sales declined by 0.7%, a sequential improvement from prior quarters but still indicating softness.

The Domestic segment, representing the vast majority of revenue ($8.13 billion in Q1 FY26), saw a comparable sales decline of 0.7%. This was driven by weakness in categories like home theater, appliances, and drones, partially offset by growth in computing, mobile phones, and tablets. The International segment ($640 million in Q1 FY26) experienced a comparable sales decline of 0.7%, impacted by negative foreign exchange rates, although this was partially mitigated by revenue from new Best Buy Express locations in Canada.

Despite the top-line pressure, Best Buy demonstrated resilience in profitability. The adjusted operating income rate remained flat year-over-year at 3.8% in Q1 FY26. This was supported by a slight increase in the domestic gross profit rate, driven primarily by improved performance in the services category, including membership offerings. However, this was partially offset by rate pressure in the Best Buy Health business and lower credit card profit-sharing revenue. Adjusted SG&A in the Domestic segment decreased, benefiting from a favorable indirect tax settlement and ongoing expense management.

GAAP operating income, however, decreased significantly from $312 million in Q1 FY25 to $219 million in Q1 FY26. This decline was primarily attributable to higher restructuring charges ($109 million in Q1 FY26 vs. $15 million in Q1 FY25). These charges were associated with a new initiative focused on optimizing the Best Buy Health business and reducing exposure to tariffs, including the decision to exit a component of the Best Buy Health business within fiscal 2026. This follows a $475 million goodwill impairment related to Best Buy Health recorded in fiscal 2025.

Net earnings in Q1 FY26 were $202 million, down from $246 million in Q1 FY25. Diluted earnings per share decreased to $0.95 from $1.13. Adjusted diluted EPS, which excludes restructuring and other items, was $1.15 in Q1 FY26, down from $1.20 in Q1 FY25, primarily due to lower investment income and a higher adjusted effective tax rate (8.6% GAAP, 27.0% adjusted in Q1 FY26 vs. 24.7% in Q1 FY25), influenced by discrete tax impacts and decreased benefits from tax matters/green energy incentives.

From a liquidity standpoint, cash and cash equivalents stood at $1.15 billion as of May 3, 2025, down from $1.58 billion at the start of the fiscal year. This decrease was primarily due to working capital timing (inventory purchases/payments), dividend payments ($202 million in Q1 FY26), capital expenditures ($166 million in Q1 FY26), and increased share repurchases ($100 million in Q1 FY26 vs. $52 million in Q1 FY25). The company maintains access to a $1.25 billion revolving credit facility, which was undrawn as of May 3, 2025. Its long-term debt includes notes due in 2028 ($500 million) and 2030 ($650 million). The capital allocation strategy prioritizes investing in the business, followed by dividends and share repurchases, while aiming to maintain investment-grade credit metrics.

The financial performance underscores Best Buy's ability to manage costs and protect margins in a challenging demand environment, even as strategic restructuring impacts reported earnings. The focus on services and operational efficiencies is contributing to profitability, while disciplined capital allocation continues to return value to shareholders.

Competitive Positioning and Strategic Response

Best Buy operates in a fiercely competitive retail landscape, facing rivals that range from e-commerce giants to mass merchandisers and specialized retailers. Key competitors include Amazon (AMZN), Target (TGT), Costco (COST), and Lowe's (LOW), all of whom compete for consumer spending in electronics, appliances, and related categories.

Best Buy's competitive strategy centers on leveraging its unique omnichannel model, tech expertise, and human touch to differentiate itself. While it faces challenges from competitors with greater scale (AMZN, TGT, COST) and potentially lower operating costs (AMZN, COST), Best Buy's strengths lie in areas where it can offer a more specialized and service-oriented experience. The Geek Squad, its in-house technical support service, provides a tangible differentiator, offering installation, repair, and consultation services that online-only players cannot easily replicate. The physical store footprint, while contributing to higher overhead compared to pure e-commerce, serves as a crucial asset for product discovery, hands-on experience, immediate fulfillment (buy online pickup in-store), and accessing expert advice.

Compared to Amazon, Best Buy positions itself on expertise and service, contrasting with Amazon's focus on vast selection and convenience. While Amazon dominates e-commerce with superior logistics and scale, Best Buy aims to capture customers who value consultation, immediate gratification through stores, and reliable post-purchase support. Best Buy's digital investments, including the planned AI-powered search and personalized app experiences, are critical to competing effectively in the online space, where Amazon holds a significant advantage.

Against mass merchandisers like Target and Costco, Best Buy offers a deeper and more specialized assortment in consumer electronics and appliances. While Target and Costco compete on price and convenience within their broader retail offerings, Best Buy's dedicated focus allows for greater product depth, vendor partnerships for enhanced in-store experiences, and specialized labor. However, Best Buy's profitability metrics (e.g., net margin 2.13% TTM) can lag behind more diversified retailers like Target (net margin 4-5%) and Lowe's (net margin 8-10%), reflecting the pressures in its core market and higher operating costs. Costco's low-margin, high-volume model, supported by membership fees, also presents a pricing challenge.

Best Buy is actively pursuing strategic initiatives to bolster its competitive standing and create new revenue streams. The planned US Marketplace is a direct response to the need for a more expansive assortment without the inventory risk, leveraging Best Buy's existing customer traffic and brand trust. This initiative, informed by the established Marketplace in Canada, aims to increase product breadth and provide new avenues for sellers, potentially driving profit dollars and unit share over time. The increased focus and investment in Best Buy Ads, its retail media network, is another strategic move to monetize its valuable first-party customer data and website traffic, expanding beyond traditional vendor partnerships to include non-endemic advertisers. These initiatives, along with growing programs like Partner Plus (leveraging supply chain capabilities for vendors) and Best Buy Business (serving commercial clients), represent efforts to diversify revenue and leverage existing assets in new ways, aiming to improve overall profitability and competitive resilience.

Vendor partnerships are also a key aspect of Best Buy's competitive strategy. Collaborations with companies like Verizon (VZ) and AT&T (T) to enhance in-store mobile phone experiences, or partnerships with brands like Samsung, Amazon (for Insignia/Toshiba TVs), and Roku (ROKU) (for TVs and advertising) demonstrate how Best Buy works with suppliers to drive sales, offer unique products, and enhance the customer experience. These partnerships are crucial in a market where product availability and vendor support can significantly impact performance.

Overall, Best Buy's competitive position is defined by its specialization and service capabilities in a market facing intense price and convenience competition. Its strategic initiatives are focused on reinforcing these strengths while building new digital and advertising capabilities to compete more effectively and diversify its revenue base.

Outlook and Forward Momentum

Best Buy's outlook for fiscal 2026 reflects a cautious optimism, balancing expectations for increasing industry stabilization and benefits from strategic initiatives against the backdrop of ongoing macroeconomic uncertainty and the evolving tariff environment.

For the full fiscal year 2026, Best Buy has provided updated guidance:

• Revenue in the range of $41.1 billion to $41.9 billion.
• Comparable sales change of down 1% to up 1%.
• Adjusted operating income rate of approximately 4.2%, consistent with fiscal 2025.
• Adjusted diluted earnings per share of $6.15 to $6.30.
• Capital expenditures of approximately $700 million.
• Share repurchases of approximately $300 million.

This updated guidance incorporates management's best estimate of the financial impacts from current tariff levels, assuming they remain in place for the rest of the year and that consumer behavior does not materially change from recent trends. Management explicitly noted that the trade policy discussions are ongoing and tariff rates could change, requiring continued agility.

The guidance anticipates a slightly unfavorable gross profit rate compared to last year, primarily due to an expected unfavorable product margin rate driven by a higher sales mix from lower-margin categories (like computing) and the need to remain competitively priced. However, this pressure is expected to be partially offset by benefits from the rollout of the US Marketplace and growth in Best Buy Ads, as well as an expected benefit from the services category (including membership). The profit share from the credit card arrangement is expected to have a neutral impact.

Adjusted SG&A as a percentage of revenue is expected to be slightly lower than fiscal 2025, reflecting anticipated benefits from ongoing efficiency initiatives (including in Best Buy Health) and the favorable Q1 indirect tax settlement. These savings are partially funding increased SG&A expenses associated with investments in the Best Buy Ads and Marketplace initiatives (advertising, technology, employee compensation).

Looking specifically at the second quarter of fiscal 2026, Best Buy expects comparable sales to be slightly down versus last year and the adjusted operating income rate to be approximately 3.6%. This lower operating income rate compared to Q1 is primarily attributed to increased SG&A, partly due to lapping a favorable legal settlement and lower medical claims in the prior year's second quarter.

Management is optimistic about several factors expected to drive sales momentum in the coming quarters. They anticipate continued growth in computing and tablets, fueled by the need for replacement and upgrades, the end of Windows 10 support in October, and the ongoing integration of AI features. Mobile phone sales are expected to benefit from improved in-store experiences with carrier partners. The gaming category is poised for momentum with new launches like the Nintendo Switch 2. The expansion of in-store experiences for emerging tech like wearable AI (e.g., Ray-Ban Meta glasses) also presents potential.

The launch and scaling of the US Marketplace and Best Buy Ads are pivotal to the FY26 strategy, expected to drive incremental profitability and position the company for future rate expansion. Operational effectiveness initiatives are crucial to funding these investments and offsetting pressures.

Overall, the outlook signals a year of transition and investment. While the top line remains sensitive to macroeconomic factors and tariffs, Best Buy is focused on executing its strategic plan, leveraging its unique assets, and building new capabilities to drive growth and improve profitability over the long term.

Risks and Considerations

Investing in Best Buy involves navigating several key risks and uncertainties that could impact its financial performance and strategic execution.

A primary risk is the dynamic and unpredictable macroeconomic environment. Persistent inflation continues to pressure consumer budgets, making them more value-focused and cautious about discretionary and big-ticket purchases. While management sees the consumer as resilient, trade-offs in spending are evident, and a material change in consumer behavior could negatively impact sales.

The evolving tariff landscape presents significant uncertainty. While Best Buy has updated its guidance based on current tariff levels and mitigation efforts, the scope, timing, and magnitude of future tariffs, as well as the reactions of other industry players and consumers to potential price increases, remain unpredictable. The company's reliance on vendor imports from countries subject to tariffs, despite diversification efforts, exposes it to potential cost increases that may be difficult to fully offset or pass on to consumers without impacting demand.

Competition remains intense across all segments. E-commerce giants, mass merchandisers, and other specialized retailers constantly vie for market share through pricing, convenience, and service. Best Buy's ability to effectively differentiate itself through its omnichannel experience, expertise, and services is critical, but competitive pressures could intensify, impacting margins and sales.

The performance of strategic initiatives is crucial but not guaranteed. The success of the US Marketplace and Best Buy Ads depends on attracting sellers and advertisers, driving customer adoption, and achieving expected profitability contributions. The Best Buy Health business has faced challenges, leading to restructuring and the decision to exit a component, highlighting the risks associated with scaling new ventures in complex markets.

Operational risks include potential supply chain disruptions, the ability to effectively manage inventory in a volatile demand environment, and the successful execution of efficiency initiatives. While the company has demonstrated strong operational capabilities, unforeseen issues could impact costs and service levels.

Financial risks include exposure to changes in interest rates (impacting investment income and floating-rate debt) and foreign currency exchange rates (impacting International segment results). While these impacts were not significant in Q1 FY26, fluctuations could affect future earnings.

Finally, the seasonality of the business, with a large portion of revenue and earnings generated during the holiday fourth quarter, means that performance in this critical period is highly influential on full-year results and is subject to intense competition and potential shifts in consumer spending patterns.

Investors should carefully consider these risks and monitor Best Buy's ability to execute its strategic plan, manage costs, and adapt to external pressures while leveraging its strengths to drive future growth.

Conclusion

Best Buy is navigating a complex retail environment marked by cautious consumer spending and evolving trade policies, yet the company is actively executing a strategic transformation aimed at reinforcing its position and cultivating future growth. While recent financial results reflect ongoing top-line pressures, the company's ability to maintain profitability through operational efficiencies and strength in its services segment demonstrates resilience.

The core investment thesis hinges on Best Buy's potential to capitalize on anticipated technology upgrade cycles, particularly in computing and mobile, while successfully launching and scaling new profit streams like the US Marketplace and Best Buy Ads. Leveraging its unique omnichannel model, tech expertise, and valuable customer relationships, Best Buy aims to differentiate itself in a competitive landscape dominated by scale and price. The disciplined approach to capital allocation, including consistent dividend payments and share repurchases, further supports shareholder value. However, the path forward is not without challenges, notably the uncertainty surrounding tariffs and the need for continued adaptation in a dynamic market. Investors should watch for progress on strategic initiatives, the impact of tariffs on consumer demand and profitability, and the company's ability to maintain operational discipline as it invests for the future.