Best Buy Beats on Q1 Earnings - Analyst Blog

Best Buy Company, Inc. BBY posted first-quarter fiscal 2015 adjusted earnings from continuing operations of 33 cents per share that surpassed both the Zacks Consensus Estimate of 19 cents per share and the year-ago quarter figure of 32 cents per share. The performance was aided by consistent cost containment, partly offset by soft top-line performance. Stock price was up 2.4% in the pre market trading hours.

Including one-time items, the company reported quarterly earnings of $1.31 per share, sharply up from earnings of 29 cents per share reported in the prior-year quarter.

Total revenue fell 3.3% to $9,035 million and lagged the Zacks Consensus Estimate of $9,235 million. Comparable-store sales (comps) declined 1.9% compared with a fall of 1.4% in the prior-year period.

Further, gross profit slid 6.4% year over year to $2,020 million during the quarter due to weak top-line performance partly offset by fall in cost of goods sold. Gross margin contracted 70 basis points (bps) to 22.4%. However, adjusted operating margin increased 30 bps to 2.3%.

Best Buy has reinforced a powerful turnaround strategy called the “Renew Blue transformation program” to rein in escalating costs. The program also includes a price match policy, multi-channel strategy, and the closure of some big box stores. In the quarter, under the “Renew Blue" program, the company achieved an additional $95 million worth of annualized savings taking the total annualized cost reductions to $860 million. The company had raised its target of cost reduction to $1 billion in the last quarter's earnings announcement.

Management is undertaking a competitive pricing strategy and making investments in areas such as online, mobile and the multi-channel approach. It is also making optimum utilization of floor area and refurbishing the functionality of its website (bestbuy.com). Best Buy's “buy online - ship from store” and digital marketing contributed 29% increment to domestic comparable online sales.

Moreover, to capture incremental revenues, Best Buy announced new home theater stores-within-a-store vendor partnerships with Samsung and Sony Corp. SNE.

Earlier Best Buy had opened "Samsung Experience Shops" within its stores. Taking the initiatives further, Best Buy had entered into partnership with Microsoft Corp. MSFT to roll out “Windows Store.” The company has unveiled 1,400 Samsung and 600 Windows stores-within-a-store.

Segment Details

Domestic segment revenues fell 2.1% to $7,781 million due to 1.3% decrease in comps.

Domestic online sales were $639 million. Comparable online sales rose 29.2% driven by improved traffic, increased average order value, and availability of better inventory due to the company's ship-from-store and online distribution center expansion.

Decline in categories like tablets, services and home theaters was more than offset by growth witnessed in computing, gaming and appliances.

The segment's gross profit fell 5.2% to $1,763 million during the quarter, while gross margin came in at 22.7%, down 70 bps due to higher costs related to product warranty, structural investments and unfavorable economics from new credit card agreement.

International segment revenues fell 10.5% to $1,254 million due to the closure of big box stores in China in the prior year, a decline of 5.8% in comps and unfavorable fluctuations in foreign exchange rates. The decrease in comps was due to sluggish industry trends in Canada, China and Mexico.

The International segment's gross profit fell 14.0% to $257 million in the quarter while gross margin shrunk 80 bps to 20.5%, reflecting lower margin product mix and increased promotional activities.

Other Financial Details

Best Buy ended the quarter with cash and cash equivalents of $2,569 million, long-term debt of $1,604 million and total equity of $4,424 million.

Guidance

For the second and third quarters of fiscal 2015, Best Buy expects comps to grow in the range of negative to low single digits due to persistent weakness in the overall consumer electronics category. Moreover, absence of new product launches and weak sales in mobile phones category will add to the woes.

Moreover, there was an adjustment related to tax structure in the quarter which resulted in accelerated non-cash tax benefit of $1.01. This benefit is treated periodically but after incorporating the full year benefit in the first quarter earnings, management expects higher tax rate going forward.

Along with other items, this income tax adjustment will affect earnings in the remaining quarters of fiscal 2015. This will impact second quarter earnings in the range of flat to increase by a penny, while for the third quarter, impact will range from flat to fall by a cent. For the last quarter earnings, there would be a negative impact of 9—10 cents.  

Currently, Best Buy carries a Zacks Rank #4 (Sell). Another retail stock worth investment includes Aaron's, Inc. AAN, which sports a Zacks Rank #2 (Buy).