Best Buy Earnings: Deep Stock Analysis for Shareholders

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Best Buy (NYSE:BBY) Q3 earnings were well below expectations. Revenue was $10.8 billion, vs. our estimate of $11.5 billion, and the consensus estimate of $10.7 billion. Non-GAAP EPS was $0.03 (excluding $0.07/share of restructuring charges), compared with our estimate of $0.14, and the consensus estimate of $0.12.

FY:13 free cash flow guidance is at least $200 million below prior guidance. Best Buy updated guidance for FY:13 free cash flow of $0.85 – 1.05 billion, down from its August guidance of $1.25 – 1.5 billion. We expect the company to continue spending on its comp growth initiatives, although a return to comp growth in the near-term is unlikely. We have modeled comp declines through the end of FY:14, and expect Best Buy to end the fiscal year with free cash flow at the low-end of its guided range, with further declines likely next year as spending continues.

Consolidated operating margin declined 300 basis points in Q3. The factors that negatively impacted gross margin in Q3 are likely to continue over the nearterm, and we expect price competition to intensify over the holidays. As Best Buy’s strategy calls for it to spend on initiatives to drive comps, we expect continued margin erosion, particularly as it matches online pricing through the holidays.