Market Overview

Best Buy Earnings Preview: Is The Turnaround Real?

Best Buy (NYSE: BBY), which is looking for a boost this holiday shopping season from the launch of the PlayStation 4 and the Xbox One, is scheduled to report its fiscal third-quarter results Tuesday, November 19, before the markets open.

The company is in a much better place that it was a year ago, with the share price up about 270 percent year to date. But investors want to know if the turnaround is real, whether initiatives like the in-house mini-stores from the likes of Microsoft (NASDAQ: MSFT) and Apple (NASDAQ: AAPL) will be enough to fend of its main challenger, Amazon.com (NASDAQ: AMZN).

See also: Are These Retail Stocks Pre-Holiday Bargains?

Expectations

Analysts on average predict that Best Buy will say that its revenue for the quarter dropped almost 13 percent year-over-year to $9.36 billion. Earnings of $0.11 per share are also in the consensus forecast. That would be up from $0.04 per share in the same period of last year.

That consensus earnings per share (EPS) estimate has not changed in the past 60 days. But note that Best Buy topped consensus EPS estimates in the previous quarter by more than 166 percent. Earnings beat expectations in the two quarters before that as well.

The company attributed the better-than-expected second quarter results to shuttering unprofitable stores and other cost cutting, as well as to enhancements in its website that boosted online sales by more than 10 percent. The share price rose more than 13 percent to a multiyear high following the second-quarter report.

Looking ahead to the current quarter, which includes the holiday shopping period, the forecast currently calls for sequential and year-over-year growth of EPS and but another decline in revenues. The full-year forecast has EPS slipping about eight percent and revenue more than 13 percent lower than a year ago.

The Company

Best Buy operates as a bricks-and-mortar and an e-commerce retailer of consumer electronics in the North America, Europe and China. Brand names include Best Buy, The Carphone Warehouse, Five Star, Future Shop, Geek Squad, Magnolia Audio Video, Pacific Sales, Cell Shop, Connect Pro and The Phone House.

The company was founded in 1966, and its headquarters are in Richfield, Minnesota. It now has a market capitalization of about $15 billion. Hubert Joly has been chief executive officer and president of the company since September 2012.

Competitors include Amazon.com and Walmart (NYSE: WMT). The former posted a net loss per share for its most recent quarter that was in line with consensus estimates. Last week, the latter beat EPS expectations by a penny but offered weak guidance.

See also: Walmart Analyst Wrap

During the three months that ended in October, Best Buy maintained its dividend, discounted the iPhone 5C and launched a trade-in promotion for iPhone buyers. In addition, founder Richard Schulze, the CEO and other insiders sold shares during the period.

Performance

Best Buy has a long-term earnings per share growth forecast of less than five percent. Its return on equity is in negative territory. The operating margin is less than that of Walmart, and the price-to-earnings (P/E) ratio is greater. Best Buy has a dividend yield of near 1.6 percent.

The number of Best Buy shares sold short, as of the October 31 settlement date, represents more than nine percent of the total float. But that was the lowest level of short interest in the past year. It would take more than three days to close out all of the short positions.

For the past two months, the consensus recommendation of the analysts surveyed by Thomson/First Call who follow the stock has been to buy shares. The analysts' mean price target, or where they expect the stock to go, is only about three percent higher than the current share price. Strong results or guidance could prompt analysts to raise their price targets.

The share price reached another 52-week high this past week. Shares are trading more than 68 percent higher than six months ago, supported in that time by the 50-day moving average. Over the past six months, Best Buy has outperformed not only the competitors mentioned above, but also the broader markets.

At the time of this writing, the author had no position in the mentioned equities.

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