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Best Buy: Many Catalysts, None Of Which Are Earnings

 November 13, 2012 10:03 AM

Consumer electronics retailer Best Buy Co., Inc. (NYSE: BBY) is expected to conduct an analyst day on Nov.13, and the earnings report is due on Nov. 20. Given the recent preannouncement, earnings are the least important catalyst in the coming weeks, trailing the potential CFO hire and any potential bid from Dick Schulze.

New President and CEO Hubert Joly will present to analysts and investors on Tuesday at 1pm in NYC. This will be his first formal remarks to the investment community, and he is expected to lay out a long term strategy aimed at stemming the tide of share loss and margin declines.

"Our suggesting would be to continue to aggressively close stores, become more price competitive and aggressively lower costs to pay for the needed price action," Deutsche Bank analyst Mike Baker said in a client note.

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Analysts may ask questions around Richard (Dick) Schulze's likely bid to buy the company, but anticipate the new CEO deflecting the questions. Finally, investors expect an official announcement from the company on their new CFO hire.

Any insight into early holiday trends and product categories that are expected to perform well this holiday will be well received by the Street.

Meanwhile, the retailer's earnings are likely to be weaker than consensus, but a relative non-event as the company already pre-announced a weaker third quarter in October. The company expects its third quarter adjusted earnings per share to be significantly below the prior-year period.

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"We are at $0.08 for 3Q12, which is considerably below the consensus of $0.14. We believe our estimates follow the pre-announced parameters, so we think consensus is too high," Baker said.

Comparable store sales are expected to decline at a rate consistent with the range of results for the first two quarters of fiscal 2013 (-5.3 percent in the first quarter and -3.2 percent in the second quarter) while consensus is down 4.2 percent. All of these estimates are consistent with the indication that comps will be down in the range of the first half, which averaged a 4.2 percent decline.

Meanwhile, WSJ reported that struggling consumer electronics retailer Best Buy (BBY) is hiring Sharon McCollam as its new chief financial officer. McCollam is the former CFO of specialty home products retailer Williams-Sonoma Inc. (NYSE: WSM).

"We think the hire of Sharon McCollam as CFO is a great fundamental move for BBY as she has been one of the more highly regarded CFO within hardlines over the past few years," Baker noted.

Under McCollam's financial leadership, Williams-Sonoma emerged from the recession with nearly a 1,000 basis points (bps) margin improvement, driven by a strategy of reducing square footage and moving sales on line. Sounds like something that would help Best Buy.

On the other hand, the board hiring a new CFO makes it less likely that they are preparing themselves to accept a buyout bid from founder Richard (Dick) Schulze.

"We expect a bid from Dick Schulze to buy the company in early to mid December," the analyst wrote.

Minnesota-based, Best Buy is the latest victim from the ongoing change in shopping habits as consumers are avoiding big box stores and are turning online for best deals. They just use big box stores such as Best Buy as a reference point and then buy their goods at a cheaper rate from online shopping sites such as Amazon.com, Inc. (NASDAQ: AMZN) and eBay, Inc. (NASDAQ: EBAY).

The company is contending with significant structural limitations in its business model. Its comparable store sales, a key metric for retailer performance, have been on the downtrend for seven straight quarters.



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