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Best Buy Co., Inc. Q1 Earnings Preview: Will Yellow And Blue Make More Green?

 May 20, 2013 04:48 PM

(By Mani) Consumer electronics retailer Best Buy Co., Inc. (NYSE: BBY) is expected to report its first quarter financial results on May 21. The company would host a conference call on the same day at 7 a.m. Central Time to discuss the results.

Wall Street expects Best Buy to earn 25 cents a share, according to analysts polled by Thomson Reuters. The consensus estimate represents a 65.30 percent decrease from 72 cents a share earned in the same quarter last year.

The company's earnings have topped Street view twice in the past four quarters while the consensus view has declined by 20 cents over the last 90 days. However, in the past 30 days, five analysts have increased their first-quarter earnings target for Best Buy.

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Quarterly revenue is expected to fall 8.3 percent to $10.64 billion from $11.61 billion in the year-ago quarter.. Total sales results are likely to be skewed as consensus estimates still seem to include Best Buy Europe, but this will be reported as a discounted operation as the company sold the unit to Carphone Warehouse.

The company had said it will not be providing financial guidance, but noted that it expects the first quarter of fiscal 2014 to be under significant pressure due to the absence of an additional week and the impact of this year's "pre-Super Bowl" sales shifting into the fourth quarter of fiscal 2013.

In addition, Best Buy cycles a number of factors versus last year, including good product launches last year and a less aggressive pricing strategy.

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Comparable store sales, a key retail metric, would be watched closely. Street expects comps to decline 1.7 percent for the first quarter.

The real debate was about the company's long-term margin outlook after years of experiencing simultaneous comp declines and gross margin deterioration.

"Our expectation is that BBY's 1Q gross margin will fall by 145 bps, which is more than the10 bps decline last quarter, primarily because of BBY's price match program as well as a more aggressive online pricing policy," Deutsche Bank analyst Mike Baker wrote in a note to clients.

"But, if the price matching manages to drive better sales in higher margin home theatre categories, we think there could be upside to our estimate. Every 10 bps of better gross margin versus our forecast would add $0.015 to EPS," Baker said.

During its fourth quarter conference call, Best Buy has outlined a number of initiatives that are aimed at reinvigorating business, including accelerating online growth, escalating the multi-channel customer experience, increasing square footage productivity through optimization and merchandising and driving down cost of goods sold through supply chain efficiencies.

The company also said it would optimize the U.S. real estate portfolio, further reducing SG&A costs and improving the international business.

Investor would look for additional details about its actions to improve the productivity of its stores. In the near-term, this means rationalizing the square dedicated to CDs and DVDs allocated more to tablets and mobile phones.

Also, the Street may want to hear more details about the company's effort to partner with more vendors to build shop-in-shops, like it recently has done with Samsung.

"As part of this relationship, BBY benefits from the labor and capital that the vendor contributes. We believe that the company is pursuing more of these partnerships," UBS analyst Michael Lasser said in a client note.

The company's progress with its online business will be a focus, and it will be important to hear about any near term improvements to improving the multichannel experience with customers.

"We also believe that BBY has closed the online price gap, which is now about 2% versus mid-to-high single digits for much of the last year. This could help online sales growth accelerate from the 11% increase last quarter (10% of sales)," Baker noted.

The improvement in online comps would be viewed as a positive milepost as a more competitive web site is key to BBY's ability to win market share back.

Meanwhile, Best Buy has guided to long-term cost cuts of $400 million, including $150 million already announced on the fourth quarter call. More cost cuts are expected to be announced this quarter and that ultimately Best Buy should be able to take out more than the guided amount.

The Richfield, Minnesota-based retailer, which is also known as the 'big blue box' because of the prominent design on Best Buy stores, reported a net loss of $409 million or $1.21 per share for the fourth quarter, sharply narrower than $1.82 billion or $5.17 per share in the prior-year quarter. Excluding charges, it reported earnings from continuing operations of $1.64 per share.

Revenue for the quarter edged up to $16.71 billion from $16.67 billion in the same quarter last year. Comparable store sales declined 0.8 percent on top of 1.3 percent drop last year.

At least ten Street analysts have "strong buy" or "buy" rating on BBY stock. Twelve analysts recommend "hold," while four analysts have a "sell" rating on the stock, which surged 128 percent year-to-date.

In the last few months, the market has realized that the company's new management team is focused on addressing some of the company's legacy inefficiencies to improve its profit profile. The first quarter will be a time when the company can showcase its progress towards the goal.



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