The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Best Buy (NYSE:BBY) will report its fiscal Q1:14 (April) results before market open on Tuesday, May 21, and host a conference call at 5am PT (877-941-8609, conf. ID: 4539171, or webcast at http://www.investors.bestbuy.com).
Last month, Best Buy announced the sale of Best Buy Europe to Carphone Warehouse for $775 million. The cash from the transaction will provide Best Buy some breathing room as it attempts its turnaround. Best Buy Europe generated $5.5 billion of revenue for the 12 months ended September 2012 and we will update our revenue estimates accordingly once restated financials are provided.
The reclassification of Best Buy Europe as discontinued operations should drive Q1 revenue below our and the consensus estimates. We expect restated revenue below our estimates of $10.7 billion vs. consensus of $10.6 billion, with comps down approximately 8%. We think margins compressed due to price matching and expect Q1 earnings of $0.19 after excluding ≈ $0.06 for Best Buy Europe, below consensus of $0.25. Operating cash flow should be weak.
We continue to expect Best Buy’s cash flow to decline. The company’s price match may eventually stem the comp declines experienced in 10 of the last 11 quarters. However, continued margin erosion from the price match is likely to result in lower profits, and we do not expect cost cuts to fully offset these lower profits. The sale of Best Buy Europe reduces cash flow further, suggesting that free cash flow in 2014 could dip below $500 million, even with further cost cuts.
We do not expect management to provide Q2:14 or FY:14 guidance. The lack of revenue and earnings guidance adds a layer of uncertainty about the company’s future, especially given expected declines in cash flow. In our view, the lack of guidance reflects the company’s lack of confidence in its core business, and highlights the many difficulties that it faces.
Best Buy management is making a solid effort, but we expect that continued migration to online retail will pressure cash flow further. Until we see comp and margin decline trends reverse, we expect to maintain our negative stance.
We reiterate our UNDERPERFORM rating and are maintaining our 12-month price target of $9; our target reflects further operating margin erosion, low visibility, lack of FY:14 guidance, the unlikelihood of a buyout, and our doubts about the company’s turnaround plan. Best Buy has been able to slow sustained comps declines only through price promotion, and we believe that continued price matching will erode margins further.
Michael Pachter is an analyst at Wedbush Securities.
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