Best Buy Company, Inc. (BBY) reported second-quarter fiscal 2015 adjusted earnings from continuing operations of 44 cents per share that came miles ahead of both the Zacks Consensus Estimate of 31 cents and the year-ago quarter figure of 32 cents per share.
Including one-time items, the company reported quarterly earnings of 42 cents per share, down from earnings of 69 cents per share reported in the prior-year quarter.
Total revenue fell 4% to $8,896 million and fell short of the Zacks Consensus Estimate of $8,968 million. Comparable-store sales (comps) declined 2.7% compared with a fall of 0.6% in the prior-year period.
Weakness in the consumer electronics industry, stiff competition from online giantslike Amazon.com Inc. (AMZN) and absence of major product launches has resulted in dwindling sales. As a result, shares lost 3.7% of their value in the pre-market trading.
Further, gross profit slid 16.4% year over year to $2,055 million during the quarter due to weak top-line performance. Gross margin contracted 340 basis points (bps) to 23.1%. However, adjusted operating margin increased 70 bps to 2.9%.
Nevertheless, Best Buy’s Renew Blue strategy continues to gain traction as domestic comparable online sales increased over 22% in the quarter driven by the company’s “buy online — ship from store” and digital marketing capabilities. Under the strategy the company has achieved an additional $40 million worth of annualized savings taking the total annualized cost reductions to $900 million. The company had raised its target of cost reduction to $1 billion at the end of fiscal 2014.
In addition, the company launched 800 new Samsung and Sony home theater, 18 Pacific Kitchen and Home and 7 Magnolia Design Center stores-within-a-store.
To combat its dismal financial run, Best Buy had reinforced a turnaround strategy called the Renew Blue transformation program to rein in escalating costs and increase online traffic as well as store conversion rate. Though industry trends do not look encouraging, we believe this strategy will help the retailer to bail it out.
Segment Details
Domestic segment revenues fell 2.4% to $7,585 million due to a 2% decrease in comps.
Comparable online sales rose 22% driven by improved traffic, increased average order value, and availability of better inventory due to the company’s ship-from-store and online distribution center expansion.
Decline in categories like tablets, services and mobile phones ran down growth witnessed in computing, gaming and appliances.
The segment’s adjusted gross profit fell 4.5% to $1,778 million during the quarter, while adjusted margin came in at 23.4%, down 50 bps due to higher costs related to product warranty, structural investments and unfavorable impact of new credit card agreement.
International segment revenues dropped 12.1% to $1,311 million due to the closure of big box stores in China in the prior year, a decline of 6.7% in comps (China, Canada, and Mexico) and unfavorable fluctuations in foreign exchange rates.
The segment’s gross profit declined 16.8% to $277 million in the quarter while margin shrunk 120 bps to 21.1%, reflecting lower margin product mix and increased promotional activities.
Other Financial Details
This Zacks Rank #3 (Hold) stock, which competes with Aaron's, Inc. (AAN) and Conns Inc. (CONN), ended the quarter with cash and cash equivalents of $2,141 million, long-term debt of $1,592 million and total equity of $4,530 million.
Guidance
Anticipating weakness in the sector to persist, management expects comps to decline in low-single digits in the second half of fiscal 2015. Operating margin would be pressured on account of lingering promotional activity.
Moreover, there was an adjustment related to tax structure in the first quarter which resulted in accelerated non-cash tax benefit of $1.01. This benefit is treated periodically but after incorporating the full-year benefit in the first quarter earnings, management expected higher tax rate going forward.
Along with other items, this income tax adjustment will affect earnings in the remaining quarters of fiscal 2015. For the third quarter, impact will range from flat to fall by a cent. During the fourth quarter, there would be a negative impact of 9-10 cents on earnings.
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