The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Best Buy (NYSE:BBY) will release holiday sales results (9-weeks ending January 5) on Friday, January 11. Similar to the past, Best Buy will not host a conference call, and will likely report before the market opens. Results will not compare directly to last year’s December sales, which included the five weeks ending December 31.
We expect the company to report holiday comps in line with our estimate of down 2.5% (down 2% domestically, down 4% internationally). Although we think demand was weak and online competition eroded Best Buy’s market share, we think that aggressive promotional activity will allow comps to come in close to our estimate. It is likely that promotions caused consolidated gross margin erosion in line with Q3:13 (down ≈150bps year-over-year), although the magnitude of the decline is only a guess. While Best Buy matched online pricing through the holidays and ran multiple holiday promotions to drive traffic into stores, we saw only marginal improvement in conversion rates, and we expect holiday comps to be underwhelming at best. We expect continued comp declines through the end of FY:14, and believe the company will end the fiscal year with free cash flow at the low-end of its guided range, with further cash flow declines likely in the out-year.
We do not expect Best Buy to revise FY:13 guidance for free cash flow of $850 million – 1.05 billion in its holiday release. We note that founder Richard Schulze continues to press for a private equity takeout of Best Buy, pending holiday sales, and think that he will…
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