Best Buy (NYSE:BBY): Q3 earnings miss driven by increased promotional activity and value pricing. Revenue was $12.1 billion, in-line with our estimate and consensus. Adjusted EPS was $0.47, compared with our estimate of $0.50, and consensus of $0.51. Comparable store sales were up 0.3% (up 0.9% domestically and down 1.7% internationally), compared with our expectation of a decrease of 5.6% (down 7.0% domestically and down 2.0% internationally).
The company maintained FY: 12 revenue guidance of $51.0 – 52.5 billion and EPS guidance of $3.35 – 3.65, which exclude $6.52 – 7.17 of net charges. Implied Q4 guidance is for revenue of $16.6 – 18.1 billion and EPS of $2.06 – 2.36.
Maintaining our FY: 12 estimate for revenue of $51.5 billion, but decreasing our EPS estimate to $3.35 from $3.46. We are maintaining our FY: 13 estimate for revenue of $52.4 billion, but are decreasing our EPS estimate to $3.50 from $3.70.
Promotions drive positive domestic comps, but lead to margin pressure. Increased promotional activity and value items drove Best Buy’s first domestic positive comp since May 2010, but gross margins were lower than expected.
Improved comps trends across many different domestic segments. Computing and Mobiles Phones and Appliances had positive comps of 8.8% and 13.7%, respectively, while CE, Entertainment, and Services all had negative comps in Q3:12, but showed improvement over Q3:11’s comps. Mobile Phones benefited from the iPhone 4S and many other new devices, while tablets had triple-digit growth due to iPads and Android devices.
Best Buy’s (NYSE:BBY) strategy of focusing on premium products at higher price points, backed by a strong service offering, is becoming outdated due to comparison shopping and the changing perception of CE. Although Best Buy remains the best available physical location to view new items from a variety of product lines and manufacturers, it is not necessarily the least expensive place to buy them. In store comparison shopping through smart phones makes the differences between Best Buy’s prices and those of its lower-priced competitors readily apparent.
Maintaining our NEUTRAL rating and 12-month price target of $25, which reflects a P/E multiple of ≈ 7x our FY: 13 EPS estimate of $3.50. This multiple is below Best Buy’s historical 12–15x multiple primarily due to slowing growth.
Michael Pachter is an analyst at Wedbush Morgan.