Best Buy Earnings Preview: Is The Turn-Around Still On Track?

Best Buy BBY will report its second quarter results before markets open on Tuesday, August 26.

Best Buy last reported its quarterly results on May 22. The retailer earned $0.33 per share, topping analyst expectations by $0.13. However, revenue declined 3.4 percent from a year ago to $9.03 billion, falling short of analyst expectations by $170 million.

During the first quarter U.S. comparable-store sales fell by 1.9 percent, worse than the 1.4 percent decline in the same quarter a year ago. International comparable sales fell 5.8 percent, worse than the 2.8 percent decline a year ago.

Best Buy's U.S. segment saw its gross profit rate fall 70 basis points to 22.7 percent mostly due to less favorable terms from its new credit card agreement. The company's International gross profit fell 80 basis points to 21.3 percent mostly due to an increased mix of lower-margin gaming and computing products and increased promotional activity in Canada.

Best Buy commented on expectations for the second quarter. The company expects “expecting to see ongoing industry-wide sales declines in many of the consumer electronics categories in which we compete.” As such, Best Buy is expecting comparable sales to be negative in the low-single digits in both the second and third quarters. The company is also expecting negative P&L impacts from ongoing investments in price competitiveness, Renew Blue investments and the negative impact of a new credit card agreement to continue.

B. Riley: Industry Trends Mostly Positive

In a note to clients on Monday, Scott Tilghman of B. Riley favors shares of Best Buy heading in to the second quarter and back-end of the year.

“Broader industry trends have been slightly positive based on data from the Department of Commerce and supported by video game data from NPD and appliance data from AHAM,” Tilghman wrote. “Plus, (gross) margin pressures are largely behind the company following shifts in pricing, mobile warranties, and the store branded credit card over the last several quarters.”

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Tilghman adds that Best Buy has been active in removing excess costs which will translate to an improved SG&A relative to sales. However, this will be further emphasized in the fourth quarter with stronger sales leverage opportunities.

Tilghman expects Best Buy will earn $0.32 per share on revenue of $9.0 billion in the second quarter. Looking further down the road, the analyst expects Best Buy to earn $2.83 for the full fiscal year 2015, well above the consensus estimate of $2.31.

Shares are Buy rated with a $47 price target.

UBS: Best Buy Should Put Up A Decent Quarter

Michael Lasser of UBS believes Best Buy will report a “decent” quarter and show further signs of turnaround the company has been making under its current management.

“Between its store improvements, the broader roll out of a ship from store, lapping the disruption from the shop-in-shop changes last year (~a 40 basis points drag), and better trends in categories like TVs and gaming, Best Buy is set to report pretty good results,” Lasser wrote in a note to clients on August 21.

Lasser has been monitoring the pricing spread between Best Buy and competitors like Amazon.com and Wal-Mart. The most recent survey for Best Buy's top selling products concluded that the retailer's pricing was 5.3 percent more expensive than Amazon.com's pricing. This is 200 basis points tighter than the previous quarter and 300 basis points tighter than a year ago.

With Best Buy's pricing matching policy, the company needs its prices only need to be close to its competitors. By matching competitors prices (such as Amazon.com) Best Buy would only be creating “a race to the bottom.”

Bottom line, Best Buy's Renew Blue initiatives reached $860 million as of the first quarter, not far off from a goal of $1 billion. Lasser believes that management must now turn its attention towards improving domestic sales.

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“We think the current administration can't really claim success until it sets a plan in motion to either consistently gain share or push into new categories,” Lasser wrote. The analyst adds that the company certainly has the resources to invest in new initiatives with its $2.57 billion in cash as of the first quarter.

Shares are Neutral rated with a $32 price target.

Industry Trends

Kimberly Greenberger of Morgan Stanley reported that retail sales growth accelerated during the summer.

The analyst believes that retail sales saw a four percent to five percent growth rate but cautions investors that this is not strong enough to drive broad-based improvement for retail equities.

“We continue to prefer Retail's secular winners and best executors. Forecasted four percent to five percent sales growth is an improvement over the first half of 2014, but falls short of our six percent to seven percent bull market bar,” Greenberger wrote in a note to clients on August 11. “Plus, we believe mid-single digit second half 2014 retail sales growth and improvement over first half 2014 is already priced into Retail stocks.”

Greenberger prefers retailers like Best Buy, along with Macy's, Nike, Starbucks and others.

Shares of Best Buy are Overweight rated.