Best Buy: Earnings Scorecard - Analyst Blog

Best Buy Company Inc. (BBY), the leading specialty retailer of consumer electronic products, reported second-quarter 2011 results on September 14, 2010 that topped the Zacks' expectations driven by a strong mobile phone business that pushed up margins.
 
Street analysts had nearly a week to digest the news. Below we cover the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.
 
Earnings Report Review
 
The quarterly earnings of 60 cents a share surpassed the Zacks Consensus Estimate of 44 cents, and soared 62.2% from 37 cents delivered in the prior-year quarter.
 
Richfield, Minnesota based company, Best Buy, said that total revenue climbed to $11,339 million, up 2.9% from the prior-year quarter, reflecting the net addition of stores in the last 12 months, and a marginal decline of 0.1% registered in comparable-store sales. However, the total revenue fell short of the Zacks Consensus Revenue Estimate of $11,530 million.
 
(Read our full coverage on this earnings report: Best Buy Tops, Lifts Guidance)
 
Agreement of Estimate Revisions
 
We see a positive inclination with most of the analysts remaining bullish about Best Buy. However, a few analysts also remain cautious about the second-half of fiscal 2011.
 
Upward Revisions
 
In the last 7 days, 14 out of 26 analysts covering the stock lifted their earnings estimates for the third quarter and 13 analysts raised their estimates for the fourth quarter of 2011.
 
Best Buy's second-quarter 2011 results came as a surprise, allaying fears of losing earnings momentum in a beleaguered economy. The quarterly earnings topped the Zacks expectations. The dominant position in the consumer electronics business enables Best Buy to sustain growth in the top-line and expand its store base. The upward trend seen in the analysts' estimates is the reflection of better-than-expected results witnessed, accompanied by an aggressive share repurchase program.
 
Moreover, following the company's increased earnings outlook based on margin expansion and share repurchase, 21 analysts have raised their estimates for fiscal 2011, in the last 7 days. Best Buy has lifted its earnings guidance to a range of $3.55 to $3.70 per share from $3.45 to $3.60 per share for fiscal year 2011, reflecting an increase of 13% to 17% year over year. None of the analysts has lowered the estimate for fiscal 2011.
 
Downward Revisions
 
In the last 7 days, 3 analysts lowered their estimates for third-quarter 2011, whereas 5 analysts lowered their estimates for the fourth quarter.
 
Best Buy saw its domestic market share shrink by 50 basis points, reflecting lower traffic counts. Analysts remain concerned as this is the first time in 18 quarters that the company has registered a fall in its market share. Although, the retailer remains optimistic to end the fiscal year with a gain in market share, analysts still expect competition to intensify from other consumer electronics retailers and mass merchants for market share.
 
Moreover, analysts also remain cautious about gross margin expansion. Management hinted about gross margin expansion in the third and fourth quarters of 2011 but informed that it expects margin expansion to be below the 100 basis-point increase posted year to date.
 
Magnitude of Estimate Revisions
 
The Zacks Consensus Estimate has been rising since the earnings release. In the last 7 days, the Zacks Consensus Estimate for the third and fourth quarters of 2011 climbed 3 cents and 2 cents to 59 cents and $2.02 per share, respectively. For fiscal 2011, the Estimate jumped 25 cents to $3.60, and for fiscal 2012, the Estimate rose 14 cents to $3.88, in the last 7 days.
 
The estimates in the current Zacks Consensus for third-quarter 2011 range from a low of 38 cents to a high of 70 cents. For fiscal 2011, the estimates range from $3.38 to $3.68.
 
Best Buy Holds Zacks #3 Rank
 
Best Buy shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold' recommendation. Our long-term rating on the stock remains ‘Neutral'.
 
The dominant position in the consumer electronic business enables Best Buy to sustain growth in its top-line, expand its store base, and enhance its market share through acquisitions. Despite losing domestic share in the recently reported quarter, the company remains optimistic to end the fiscal year 2011 with a gain in market share helped by solid store execution and new store openings.
 
Another factor driving growth is Best Buy's customer centricity operating model. The stores tailor their store merchandising, staffing, marketing and presentation to meet the distinct needs of targeted customers. The company's wide array of assortments, store formats and brand marketing strategies provide an edge over competitors.
 
However, we remain concerned about stiff competition, falling comps in televisions, and entertainment hardware and software categories and cautious consumer behavior.
 
About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/