Best Buy Earnings Cannot Hide Weakness

BestBuy storefront OK
BestBuy storefront OK

Best Buy Co. Inc. (NYSE: BBY) reported first-quarter fiscal 2014 results before markets opened this morning. The big-box retailer of electronics gear posted adjusted diluted earnings per share (EPS) of $0.32 and $9.38 billion in revenues. In the same period a year ago, Best Buy reported EPS of $0.76 on revenue of $10.37 billion. First-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $0.25 and $10.64 billion in revenue.

On a GAAP basis, Best Buy posted a net EPS loss of $0.24.

The company did not provide financial guidance for the second quarter, but Best Buy's CFO did say that continuing investments in "price competitiveness," which knocked down both revenues and profits in the first quarter, will continue into the second quarter. In fact, there is a laundry list of spending, according to the CFO, in addition to the build out of the store's Samsung Experience Shops:

We also expect to see a greater negative impact from our Renew Blue capital and SG&A investments in the second quarter in the areas of (1) online; (2) mobile; (3) the multi-channel customer experience; and (4) the replatforming of for which financial benefits are not expected to be realized until fiscal 2015 and beyond.

The company's CEO said:

As expected, first quarter Domestic comparable store sales were down 1.1%. This was the result of the Super Bowl shifting into last year's fourth quarter as well as our decision to reduce sales in certain non-core businesses. Excluding these impacts, Domestic comparable store sales were flat for the quarter despite no new major product launches and late deliveries in the smartphone category …

Same-store sales fell 1.1% in the United States and 2.8% internationally. Domestic online sales grew by 16.3% in the quarter. The store posted good sales in mobile phones and appliances, but these were more than offset by lower sales of home theater and gaming.

Best Buy closed 49 U.S. stores and 15 Canadian stores in 2012. As the company gets smaller there is less revenue to pay for the massive overhaul to the remaining stores. At some point Best Buy will close one too many stores and the whole house of cards could collapse.

When Best Buy reported fourth-quarter earnings in March, the consensus estimates called for EPS of $0.46 and $10.87 billion in revenue. By the end of the quarter, the EPS estimate had fallen to $0.25, so the company's report today represents a step, not a leap, over a very low bar. Revenue missed even the diminished expectations, and the company faces at least another 12 months of higher expenditures and lower profits. That will not make investors happy.

Shares are down about 2% in premarket trading this morning, at $26.27 in a 52-week range of $11.20 to $27.37. Thomson Reuters had a consensus analyst price target of around $24.90 before today's results were announced.

Filed under: 24/7 Wall St. Wire, Consumer Electronics, Earnings, Retail, Services Tagged: BBY, featured