Market Overview

Best Buy Tumbles on Earnings Miss

Shares of electronics retailer Best Buy (NYSE: BBY) traded lower on Tuesday, down over 11 percent, after the company reported disappointing earnings for the third quarter.

Year-to-date, shares of Best Buy are down over 40 percent. A combination of management issues and secular trends has wrought havoc on the retailer's shares.

For the third quarter, Best Buy reported an earnings per share figure of $0.03, less than the $0.12 that analysts had been expecting. The company had previously guided for the quarter, but said only that earnings would be “significantly below” $0.47. Revenue was slightly better than expected, coming in at $10.8 billion -- more than the $10.73 billion that was anticipated.

Perhaps most ominous was the state of the company's cash flows. Best Buy said its fiscal-year free cash flow would be between $850 million and $1.05 billion; previously, the company had expected $1.25-1.5 billion.

Comparable sales also declined, dropping 4.3 percent. Expectations were for a decline of 3.3 percent.

On the subsequent earnings call, Best Buy said that results this quarter should not be extrapolated to future quarters, and that the rate of profit decline seen in the third quarter won't be repeated in the fourth. Still, the company's new CEO -- Hubert Joly -- said that the company's unsatisfactory results raises the need for an urgent turnaround.

With Tuesday's decline, Best Buy shares are now trading near $13. If investors believe the reports about a takeover, there could be some arbitrage potential.

Best Buy's former chairman and founder, Richard Schulze, is reportedly in the process of attempting to take Best Buy private. Back in August, Schulze publicly stated that he wanted to make a bid in the range of $24-28. At Best Buy's current valuation, that would represent a huge premium.

But a premium that large seems unlikely in light of Best Buy's recent quarter.

The New York Post reported on Monday that Schulze could make a new bid in the range of $20. But will a bid ever come?

Bloomberg said that private equity firms Cerberus, TPG and Leonard Green could be working with Schulze to secure financing for a takeover. As Best Buy's situation deteriorates, that financing might be increasingly hard to come by.

Analyst Brian Sozzi told Benzinga he remained extremely bearish on the company, and was concerned with cash flow. Sozzi said that the Street had been anticipating a disappointing quarter, but the results were even worse than expected. If Schulze makes a bid, Sozzi thought it would be in the $15 range.

Yet, on a positive note, Black Friday is rapidly approaching. Best Buy shares might see a relief rally on reports on strong sales. Best Buy's sales on TVs are an annual highlight, and some shoppers are already camping out in front of Best Buy stores days ahead of the sale.

Shares of Best Buy traded near $12.16 on Tuesday.

Posted-In: Analyst Color Earnings News Management M&A Intraday Update Analyst Ratings Movers Best of Benzinga

 

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