Can Best Buy Overcome Margin Pressures? Analyst Anticipates Q2 Earnings

Best Buy (BBY) shares declined after BofA Securities reiterated an "Underperform" rating and $63 price target, with analyst Robert F. Ohmes forecasting Q2 EPS of $1.23 and comps of -0.3%. Ohmes highlighted ongoing margin pressures from a highly promotional environment, the online sales mix, and SG&A deleverage, which are only partially offset by the cycling of prior cost benefits. While a planned marketplace expansion and retail media growth are projected to be margin-accretive by FY26, the near-term outlook remains challenged by these operational headwinds.

Analysis

Best Buy's stock is under pressure, declining 2.16% to $72.50 following a BofA Securities report that reiterated an "Underperform" rating with a $63 price target. The near-term outlook is challenged by significant margin headwinds ahead of its second-quarter earnings report. BofA projects Q2 EPS of $1.23 and a comparable sales decline of -0.3%, with gross margins forecast to be flat year-over-year at 23.5% as the benefits from previous Geek Squad headcount reductions have been fully lapped. Margin compression is being driven by multiple factors: a highly promotional environment with average discounts of 13% on key categories, a sales mix shifting towards lower-margin online channels that have weaker warranty attachment rates, and an expected 45 basis points of SG&A deleverage from lapping a one-time $20 million legal settlement benefit. While the divestiture of Current Health is expected to remove a drag, the primary long-term margin-accretive catalysts—a marketplace expansion to 500 vendors and growth in retail media—are not expected to meaningfully impact results until fiscal 2026, leaving the company exposed to current operational challenges.

Key Decisions for Investors

• Given the reiterated 'Underperform' rating and identified margin pressures from promotions and SG&A deleverage, investors should consider the near-term downside risk ahead of the August 28 earnings call.
• Monitor the upcoming Q2 report for management's commentary on gross margin trajectory, specifically the impact of the promotional environment and the sales mix between online and in-store purchases.
• For longer-term investors, the key catalysts to track are the execution and adoption of the marketplace and retail media initiatives, as these are positioned as the primary drivers for margin improvement in fiscal 2026.