In-Depth Analysis: Best Buy (BBY, AMZN, WMT, BKS, BGP)

Best Buy BBY reported fourth quarter and full year earnings yesterday and failed to meet analysts' expectations. Best Buy reported revenue of $16.26 billion in the fourth quarter compared to $16.55 billion in the same period a year ago, or a decrease of 1.8%. Net income decreased by 16.4% from $779 million to $651 million. Thus, earnings per share fell from $1.82 to $1.62.This decrease largely reflects Best Buy's decision to spend $222 million in restructuring charges to focus its international efforts and drive supply chain efficiencies. Excluding restructuring charges, earnings per share rose for the quarter to $1.98 which beat analyst estimates. Nonetheless, Best Buy's stock price showed that investors were less than thrilled with the earnings news. Best Buy's share price fell 5.4% on the release of the earnings information. Best Buy struggled domestically: revenue fell 4% versus the prior-year period. Most notably, there was double-digit decline in sales of entertainment hardware and software and TVs. Consumer demand for new television technologies was not a significant revenue-generator. Where the domestic segment declined, it was offset by the 4% increase in the international segment. This increase is mostly due to new store openings and a favorable fluctuation in currency exchange rates during this time. As Benzinga readers already know, Best Buy has missed quarterly estimates badly in the last year, and is considering the possibility that it may have to lower prices to remain competitive with Amazon AMZN and Wal-Mart WMT. The question remains, how likely is it that Best Buy can remain profitable competing with these two companies. Best Buy has a similar problem that the bookseller industry is currently experiencing. Barnes and Noble BKS struggles (as did Borders BGP with operating and maintaining its physical store locations. Amazon is able to sidestep this cost by only existing in the online realm. This unique advantage allows Amazon to win almost every time against companies with physical stores. Best Buy's main competitor Circuit City has already gone bankrupt, which should spell good news for the former. However, because Amazon and discount stores like Wal-Mart are able to sell the same products (and more) for less, Best Buy is surely having trouble drawing in customers and retaining them. The struggles facing the electronics giant is evidenced in its share price over the last year. Since December, its stock has fallen over 30% and is trading near its 52-week low. Does this spell entry point or lost cause? Examining Best Buy's financials for the fiscal years ending 2010 and 2009, it would appear as though the company is improving on an internal basis. Profit margin increased from 2.2% to 2.6%. Although it is difficult to directly compare Best Buy's ratios to its competitors because both Amazon and Wal-Mart are immersed in many other markets other than electronic goods. Thus, the following Du Pont analysis is made with caution. Both Wal-Mart and Amazon have much better operating efficiency as demonstrated by profit margins in 2009 and 2010, above 3.3% each year. Best Buy on the other hand reaches 2.6% in 2010 from 2.2% in 2009. Another component of the Du Pont is asset turnover. Because asset turnover is very specific to the industry, and these three companies quite diverse, it may be imprudent to read much into the discrepancies among them. Regardless, Best Buy boasts the best asset use efficiency. This ratio is likely to be influenced by the fact that Best Buy was engaging in stock repurchases serving to reduce total assets which may artificially give the appearance of better asset turnover. However, it is interesting to note that Best Buy is the most highly leveraged of the three; its equity multiplier is 2.9 in 2010, down from 3.4 in 2009. However both Wal-Mart and Amazon have kept their ratios under 2.7. Ultimately, return on equity is highest for Best Buy, influenced by the fact that it undertakes more debt than its competitors. More important than the financials is Best Buy's business strategy. Investors may want to ask some tough questions. How does Best Buy plan to compete in an internet-dominated sales environment? How can Best Buy justify the costs of keeping stores open? Best Buy may not be in much fiscal trouble just yet, but investors may want to seriously consider its long term prospects. With a string of disappointing earnings in the recent past, Best Buy must either force itself to adjust to a changing world or sink like Circuit City. Neither Benzinga nor its staff recommends that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.