Best Buy Tops, Lifts Guidance - Analyst Blog

Best Buy Company, Inc. (BBY), the leading specialty retailer of consumer electronic products, recently reported second-quarter 2011 results that topped Zacks’ expectations, driven by a strong mobile phone business that pushed up margins, thereby sending shares up $3.07 or 8.9% to $37.75 in early hours trading.

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. The increase in the top-line offset a 1% rise in cost of goods sold and a 4.3% jump in selling, general and administrative expenses leading to an increase in margins.

Gross profit surged 8.7% to $2,918 million, whereas gross margin expanded 130 basis points (bps) to 25.7%. Operating income surged 46.8% to $411 million, whereas operating margin increased 110 bps to 3.6%.

Richfield, Minnesota-based 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. Comps in the prior-year quarter had declined 3.9%.

However, the total revenue fell short of the Zacks Consensus Revenue Estimate of $11,530 million.

Domestic segment revenue grew 2% to $8,436 million, reflecting the addition of new stores, and a fall of 1.4% in comparable-store sales due to lower traffic counts. Comps in the prior-year quarter had declined 3.1%. Domestic gross margin increased by 150 bps to 25.8% due to the improvement in promotional activities and sustained growth in Best Buy Mobile.

By category, mobile phones’ comparable-store sales climbed in the low double-digits, whereas appliances registered a high single-digit sales increase, and mobile computers including tablet computers portrayed a mid-single-digit gain. These were offset by softness in televisions and entertainment hardware and software. Best Buy notified that it experienced a low-double-digit decline in comparable-store sales in televisions due to low-double-digit decline in the sale of television units and falling prices.

Best Buy saw its domestic market share shrink by 50 basis points, reflecting lower traffic counts. However, the retailer remains optimistic to end the fiscal year with a gain in market share. In the past it has been witnessed that the company has increased its market share since the liquidation of its archrival Circuit City.

International revenue soared 5.6% to $2,903 million, driven by the net addition of new stores in the last 12 months, and a 4.3% gain in comparable-store sales. Comps in the prior-year quarter had fallen by 8.3%. Best Buy Europe posted a 4% increase in comparable-store sales. China reported a 20% gain in comparable-store sales, whereas Canada experienced a 1% fall in comparable-store sales.

International gross margin expanded 110 bps to 25.6%.

Based on margin expansion and share repurchase, the nation's largest electronics retailer has lifted its earnings guidance to a range of $3.55 to $3.70 from $3.45 to $3.60 per share for fiscal year 2011, reflecting an increase of 13% to 17% year-over-year. The current Zacks Consensus Estimate for the year stands at $3.38 per share.

Revenue in fiscal 2011 is expected to be $52 billion, reflecting an increase of 5%. Comparable-store sales are expected to rise in the range of 1% to 2%. Management also expects operating margin to rise by 40 to 55 bps.

Best Buy ended the quarter with cash and cash equivalents of $843 million, and total long-term debt of $1,120 million, reflecting a debt-to-capitalization ratio of 14.5%. During the quarter, the company bought back approximately 17 million shares at a price of $34 per share, aggregating $600 million. The company still has $1.8 billion at its disposal under its $5.5 billion share repurchase authorization.
 
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