Best Buy beats on Q3 earnings but stock down more than 10% on rising costs

Yahoo Finance's Julie Hyman and Brian Sozzi discuss the market reaction to Best Buy earnings after the company forecast a weaker holiday season.

Video Transcript

BRIAN SOZZI: Well, kind of, it's still in these work-from-home plays. Look at Best Buy. I mean, Best Buy is out with earnings this morning. Stock is getting hammered, 15% here in the pre-market.

And this is tough to see because Best Buy shares, I should note, they were up about 17% over the past month into this report. A lot of expectations built in on a very strong holiday shopping season. And I would say Best Buy delivered here, Julie. I mean, their same-store sales up double-digit percentages, that was good. You saw really some strong same-store sales by product category, that was good.

Even considering that they saw a really huge, humongous gains in sales last year as we all switch to this work-from-home environment, company came out also to, I would say, upbeat guidance here. But again, I think the street may be just want a little bit more in their fourth quarter holiday outlook. Not to say they're going to have a bad season, I just think this comes back down to the expectations game.

JULIE HYMAN: Well, and there might have been the margin issue, too, right? So, many of the companies that we've heard from going into this holiday season have fallen into two categories-- you have the companies who have been raising prices, taking sales, but also keeping, in many cases, keeping up traffic, right? And then you have the companies-- and I think Walmart and Target are the two most notable examples-- where sales are still robust, but they are not necessarily taking the same level of price increase in order to keep value for the customers and to keep market share.

And Best Buy, maybe, is falling into somewhat of that latter category. You also might wonder if there is not that same sort of elasticity and pricing power in electronics, perhaps, as there is in other types of products. Whatever the case, gross margin was down a tenth of a percentage point, which is not a big decline. But given that so many companies are seeing gross margins expand because they're raising prices, that might be problematic for Best Buy.

So gross margin was 23.5%. Looks like analysts were looking for a little bit better than that. 23.6% again, it's not a huge difference. But in this environment, perhaps, that's also something that made enough of a difference that is causing the stock to sell off.

BRIAN SOZZI: Yeah. A couple of quick finer points here before we keep it moving. Inventory levels up $1 billion year over year. Another big box retailer that looks to be well stocked for the holiday shopping season. Target inventory levels are up nicely year over year, same with Walmart. I believe BJ's Wholesale also inventory levels up, so that is pretty good.

But to your point on margins, Julie, US margins, operating margins down year over year. International was a little bit better. But if there wasn't anything-- another positive here, it was appliance sales. You know, I can't help but think back to our chat with Marc Bitzer, CEO of Whirlpool, noting continued strong demand. Same store sales for appliances at Best Buy up over 10%, so that was a good worth-- a good note worth mentioning there.