Best Buy Is Laughing at You


Who were the people that bid up shares of Best Buy to a fresh 52-week high yesterday?

The troubled consumer electronics retailer posted horrendous fiscal first-quarter results this morning. Best Buy won't tell you that. In fact, the press release's headline -- Best Buy Reports Better-Than-Expected First Quarter Results -- is one of the many inside jokes that investors will see as they explore the numbers.

It's true that the adjusted earnings of $0.32 a share did beat Wall Street estimates of $0.25 a share, but are we celebrating a 58% plunge in adjusted net income?

More importantly, how is a nearly 10% plunge in revenue better than the 8% drop that analysts were projecting?

Revenue slipped as the company closed down dozens of stores in the middle of last year and domestic and international comps declined 1.1% and 2.8%, respectively.

If you're ready for some laughs, follow me down the rabbit hole.

Best Buy argues that stateside comps would've been flat if the Super Bowl hadn't shifted into last year's fiscal fourth quarter. The company's decision to reduce sales in certain non-core businesses also kept comps down.

Let's tackle the Super Bowl first. The "pre-Super Bowl" sales phenomenon apparently took place during the holiday quarter, but the benefit during that quarter was just 35 basis points -- or 0.35%. The balance, then, would seemingly come from the company's decision to reduce sales, but wasn't it really the customer's decision to reduce purchases?

We can't argue that Best Buy was moving toward higher-margin products in its shift away from non-core businesses, because that certainly didn't happen. Gross profit margins shrank from 25.3% during last year's first quarter to 23.4% this time around, and that's with legal settlement proceeds padding that number this time around.

And -- once again -- let's clarify that when Best Buy tweaks conditions to arrive at "flat" comps, it doesn't mean that the average store would be selling as much as it did a year earlier. Best Buy adds online sales to its comps mix, and that 7% increase -- or 16% on a comparable basis given one fewer week this time around -- is divided into what is now fewer stores after the 49 springtime closures last year.

So why did Best Buy hit fresh highs this week when it's a shell of the company that it was a week ago?

The only growing product categories at Best Buy are smartphones and appliances. If mobile is so lucrative, why is RadioShack -- a company that put all of its eggs into the wireless basket two years ago -- losing so much money? Appliances are booming in popularity. It's part of the real estate revival. However, if investors want in on that, isn't it smarter to go for Conn's or hhgregg , where it's a bigger part of their product mix? Appliances accounted for 43% of hhgregg's sales this past quarter.

Best Buy CEO Hubert Joly has done an admirable job of shaving costs and unloading the company's problematic European business. Thinning gross profit margins prove that he's carrying through on his goal to pass on the savings to consumers in an effort to compete against cheaper and nimbler online merchants. However, this all ultimately adds up to a business where things may get worse before they get better.

A 52-week high just doesn't add up, and it's a joke that reasonable investors just don't get.

Knock knock
The brick-and-mortar vs. e-commerce battle wages on, with Best Buy caught in the middle. After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. How will new leadership perform? Will a smaller store format work out for both the company and its brave investors? Should you be one such brave investor? To help answer all these questions, The Motley Fool has released a premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report today.

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Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends hhgregg and owns shares of RadioShack. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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