BBY Q2 Deep Dive: Mixed Category Performance and Margin Pressures Shape Outlook

Electronics retailer Best Buy (NYSE:BBY) beat Wall Street’s revenue expectations in Q2 CY2025, with sales up 1.6% year on year to $9.44 billion. The company expects the full year’s revenue to be around $41.5 billion, close to analysts’ estimates. Its non-GAAP profit of $1.28 per share was 4.5% above analysts’ consensus estimates.

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StockStory’s Take

Best Buy’s second quarter saw revenue and non-GAAP earnings per share exceed Wall Street expectations, but the market responded negatively due to ongoing margin pressures and mixed category performance. Management credited strong sales in gaming—highlighted by the Switch 2 launch—along with computing, mobile phones, and wearables for driving growth. However, these gains were offset by continued softness in home theater, appliances, tablets, and drones. CEO Corie Barry pointed to heightened promotional activity and a shift in sales mix toward lower-margin categories as key reasons for the company’s operating margin decline.

Looking ahead, Best Buy’s full-year guidance is underpinned by expectations of continued category momentum in gaming, computing, and phones, supported by vendor partnerships and new product launches. Management flagged ongoing gross margin pressure from a higher mix of lower-margin goods and aggressive pricing as a risk. CFO Matt Bilunas stated, “We are maintaining our annual guidance and expect gross profit rate pressure to persist,” while also emphasizing cost efficiencies and the rollout of the new marketplace and advertising initiatives as levers for profit stabilization.

Key Insights from Management’s Remarks

Management attributed the quarter’s revenue growth to a successful product launch cycle in gaming and ongoing strength in computing, even as structural challenges in higher-priced categories weighed on margins.

• Gaming category momentum: The Switch 2 release drove significant sales, with Best Buy not only benefiting from hardware but also increased demand for related software and accessories. Management highlighted midnight launches and in-store events, citing both customer engagement and successful inventory management as contributors.

• Computing upgrade cycle: Best Buy saw its highest second-quarter laptop unit sales in 15 years, as shoppers replaced aging devices ahead of Windows 10 support expiration. The company also pointed to growing demand for devices with enhanced AI features, supported by exclusive product offerings and expert guidance.

• Vendor partnerships and support: Vendor investment in in-store labor and training increased by 20%, enabling more specialized customer experiences and reinforcing Best Buy’s ability to showcase new technology. CEO Corie Barry emphasized the importance of physical space and live demonstrations for complex consumer electronics.

• Gross margin pressure: The quarterly gross margin declined due to a higher sales mix of lower-margin categories like gaming and computing. Management stated that competitive pricing and promotional intensity, particularly during key sales events, played a role in margin compression.

• Assortment and marketplace expansion: The recent launch of Best Buy’s online marketplace expanded product variety sixfold, adding new brands and categories. Management expects this initiative to drive incremental profit and unit share, with in-store associates integrating marketplace offerings into customer shopping experiences.

Drivers of Future Performance

Best Buy’s outlook for the rest of the year is shaped by ongoing innovation in key categories, continued vendor collaboration, and efforts to manage margin headwinds through efficiency and portfolio expansion.

• Category innovation and replacement cycles: Management expects further sales growth in gaming, computing, and mobile phones, driven by ongoing product launches such as new AI-enabled laptops and the lingering impact of the Switch 2. The upcoming Windows 10 end-of-life is anticipated to spur additional upgrades in computing.

• Marketplace and advertising initiatives: The company is rolling out its expanded marketplace and increasing investment in its retail media network, Best Buy Ads. These efforts are projected to enhance gross profit rates, although initial operating income impact will be neutral due to up-front investment.

• Margin and pricing challenges: Management cautioned that higher promotional activity and a continued mix shift toward lower-margin products could keep gross margins under pressure. Ongoing tariffs and cost-sharing arrangements with vendors remain additional sources of uncertainty.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will focus on (1) the pace of adoption for Best Buy’s expanded marketplace and its impact on traffic and unit share, (2) the effectiveness of new product launches in gaming and computing, particularly as Windows 10 support ends, and (3) progress in margin stabilization amid higher promotional activity and supply chain adjustments. Execution in vendor partnerships and the scaling of Best Buy Ads will also be important areas to watch.

Best Buy currently trades at $72.60, down from $75.46 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free).

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