Best Buy Misses, Lowers Outlook - Analyst Blog

Best Buy Company, Inc. (BBY) posted lower-than-expected third-quarter 2011 results and lowered its full year outlook, sending shares down $6.05 or 14.5% to $35.65 in pre-market trading.

The quarterly earnings of 54 cents a share missed the Zacks Consensus Estimate of 60 cents, but rose marginally by 1.9% from 53 cents delivered in the prior-year quarter, due to tight cost control. The Zacks Consensus Estimate had remained stable prior to the earnings announcement, despite 2 out of 26 analysts raising their estimates and 1 analyst lowering the projection in the last 7 days.

Management now expects fiscal 2011 earnings in the range of $3.20 to $3.40 down from $3.55 to $3.70 anticipated earlier. The current Zacks Consensus Estimate for fiscal year is $3.59. Following a lower-than-expected results and a truncated guidance, a negative sentiment may be palpable among the analysts covering the stock, and we could witness a fall in the Zacks Consensus Estimate in the coming days.

The company witnessed that the fall in the top-line and a 1.2% increase in selling, general and administrative expenses were offset by 1.9% drop in cost of goods sold leading to an increase in margins.

Gross profit climbed 1.4% to $2,983 million, whereas gross margin expanded 60 basis points (bps) to 25.1%. Operating income rose 2.4% to $385 million, whereas operating margin increased 10 bps to 3.2%.

Richfield, Minnesota-based company, Best Buy said that total revenue tumbled 1.1% to $11,890 million from the prior-year quarter, reflecting a 3.3% fall registered in comparable-store sales, offset by the net addition of stores in the last 12 months. Comps in the prior-year quarter had rose 1.7%.

The total revenue also fell short of the Zacks Consensus Revenue Estimate of $12,484 million.

Domestic segment revenue slipped 2.5% to $8,710 million due to a fall of 5% in comparable-store sales, offset by the addition of new stores in the last 12 months. Comps in the prior-year quarter had increased 4.6%. Domestic gross margin increased by 90 bps to 25% due to the improvement in promotional activities and sustained growth in Best Buy Mobile.

The Domestic segment witnessed a low-double digit decline in comparable-store sales for televisions, and entertainment hardware and software. Best Buy notified that it experienced a decline in comparable sales in televisions due to low-double digit decline in the sale of television units and falling prices. Mobile phones' comparable-store sales climbed in the low double-digits, whereas mobile computing sales rose in the mid-single digit. Domestic online revenue jumped 7%.

Best Buy, which faces competition from Wal-Mart Stores Inc. (WMT), saw its domestic market share shrink by 110 basis points, reflecting fall in televisions, mobile computing and gaming software. The retailer now expects to end the fiscal year with a loss in market share.

International revenue climbed 2.8% to $3,180 million driven by the net addition of new stores in the last 12 months, and a 2.3% gain in comparable-store sales. Comps in the prior-year quarter had fallen by 6.7%. Best Buy Europe posted a 2% increase in comparable-store sales. China reported a 28% gain in comparable-store sales, whereas Canada experienced a 4% fall in comparable-store sales. International gross margin contracted 20 bps to 25.2%.

Best Buy ended the quarter with cash and cash equivalents of $925 million, and total long-term debt of $1,134 million, reflecting a debt-to-capitalization ratio of 14.5%, and shareholders' equity of $6,665 million. During the quarter under review, the company bought back approximately 11 million shares at a price of $38.69 per share, aggregating $420 million. The company still has $1.4 billion at its disposal under its share repurchase authorization.

Currently, we have a Neutral rating on the stock. Moreover, Best Buy holds a Zacks #3 Rank, which translates into a short-term ‘Hold' rating, and correlates with our long-term recommendation.

 
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