Best Buy Company Inc. (BBY), the leading specialty retailer of consumer electronic products, recently posted better-than-expected first-quarter 2013 results. The quarterly earnings of 72 cents a share handily surpassed the Zacks Consensus Estimate of 59 cents and increased 11% from 65 cents earned in the prior-year quarter.
However, including one-time items, the company reported earnings of 47 cents, down 27% from the year-ago quarter.
Result in Detail
Richfield, Minnesota-based Best Buy stated that total revenue increased 2.1% year over year to $11,610 million. However, excluding the impact of extra week in the quarter on account of change in the company’s fiscal year, total revenue marked a decline of 4.3%. The Zacks Consensus Estimate for the quarter was $11,512 million.
Comparable store sales marked a decline of 5.3% compared with a decrease of 3% in the prior-year period.
Gross profit remained flat at $2,907 million during the quarter, whereas gross margin remained contracted 70 basis points to 25%. Adjusted operating income decreased 16% to $389 million, whereas operating margin shrunk 70 basis points to 3.4%.
Domestic segment revenue increased 5.1% to $8,822 million, reflecting a 20% jump in online revenue coupled with 11% rise in both services revenue and connections. Comparable-store sales marked a decline of 3.7% during the quarter, reflecting sales decline in gaming, notebooks, digital imaging and televisions. However, comps of mobile phones jumped 13%, while tablets, appliances and eReaders registered a healthy growth.
Domestic segment’s gross profit increased 4% to $2,233 million during the quarter, while gross margin came in at 25.3%, down 30 basis points.
International revenue decreased 6.3% year over year to $2,788 million. However, comparable-store sales decreased 10.5%, reflecting revenue declines in Five Star business in China. Moreover, weaker sales of notebooks, home theater and gaming in Canada negatively impacted the results.
The International segment’s gross profit marked a decline of 13% to $674 million during the quarter, while gross margin came in at 24.2%, down 180 basis points.
Balance Sheet, Share Buybacks & Dividend
Best Buy ended the quarter with cash and cash equivalents of $1,386 million, total long-term debt of $1,721 million, and shareholders’ equity of $4,315 million.
During the quarter, the company bought back approximately 4.6 million shares for $115 million at a price of $25.07 per share. Moreover, the company also paid a quarterly dividend of 16 cents per share, aggregating $55 million.
Turnaround Strategies
The company had earlier announced string of strategic measures to enhance its long-term profitability. With its multi-channel strategy, the company intends to enhance its store formats while increasing its global footprints.
The company will shutter some big box stores which are not contributing to growth, while modifications of others are also on the cards. The company announced the closing of 50 U.S. Best Buy big box stores in fiscal 2013, of which 41 stores were closed during the quarter under review.
Best Buy, through its cost reduction program, intends to generate $800 million in costs saving by fiscal 2015, including $250 million in fiscal 2013.
The company plans to open 100 U.S. Best Buy Mobile small format stores in fiscal 2013 and intends to increase the total number of such stores to 600-800 by fiscal 2016.
Going forward, Best Buy plans to accelerate the growth of its business in China coupled with a growth in connections and services and digital capabilities. Best Buy expects to open 50 new Five Star stores in China in fiscal 2013, while it plans to generate $4 billion in sales and increase the store count to 400 – 500 by fiscal 2016.
Best buy expects to generate a 15% increase in its Domestic online sales in fiscal 2013. The company targets $4 billion online sales by fiscal 2016. Revenue in Domestic segment services category is expected to increase by 10% in fiscal 2013.
Connections in the U.S. are expected to rise by 15% in fiscal 2013, driven by growth in mobile phone, tablets and computing connections.
Best Buy expects fiscal 2013 revenue between $50 billion to $51 billion, while comparable store sales are expected to decline by 2.1%.
Adjusted operating income is expected to decrease in the range of 4% to 11% compared with the prior year results.
Cushioned by the impact of share repurchases of approximately $750 million to $1.0 billion, the company stood by its earlier guidance and expects earnings in the range of $3.50 to $3.80, up 3% to 12% from the prior year. On a GAAP basis, the company projects earnings between $2.85 and $3.25 per share.
Currently, we have a long-term Neutral recommendation on the stock. Moreover, Best Buy, which faces competition from Wal-Mart Stores Inc. (WMT), holds a Zacks #3 Rank that translates into a short-term Hold rating.
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