Analyst: Is Best Buy’s Turnaround Plan Working?

Source:  Rob Lawton (roblawton) / Flickr

Source: Rob Lawton (roblawton) / Flickr

Negative domestic comps and International segment decline drove a top line miss, but EPS above expectations due to cost savings initiatives. Revenue was $9.0 billion, compared with our estimate of $9.2 billion and the consensus estimate of $9.2 billion. Non-GAAP EPS was $0.33 (excluding a $0.98/share net benefit), compared with our estimate of $0.20, and the consensus estimate of $0.20. Comparable-store sales were down 1.9 percent (down 1.3 percent domestically and down 5.8 percent internationally), compared with our expectation for a decrease of 0.8 percent (down 1.0 percent domestically and flat internationally.)

Best Buy’s (NYSE:BBY) segments saw mixed results. Domestic consumer electronics declined 4.1 percent and services declined 13.5 percent, while appliances, entertainment, and computing and mobile phones saw comp increases of 9.1 percent, 1.5 percent, and 0.6 percent, respectively. Each of these trends is likely to repeat over the balance of the year.

Domestic online sales comped +29.2 percent to $639 million. The positive comp was driven by higher average order value, improved inventory availability supported by ship-from-store and online distribution center expansion initiatives, increased traffic, and a higher number of online orders being placed in retail stores.

Unfortunately, total domestic online revenue gains were $144 million, more than offset by domestic store level sales declines of $342 million. While we think that increasing its online presence is essential for Best Buy’s survival, we think that the trend is moving against it, as its in-store sales continue to decline at a more rapid pace than it has been able to increase online sales.

We are decreasing our FY:15 revenue estimate to $41.5 billion from $42.1 billion to reflect continued comparable store sales declines, but are increasing our EPS estimate to $1.98 from $1.78, reflecting SG&A cost reductions and effective tax rate adjustments. As expected, management did not provide detailed Q2:15 or FY:15 revenue or EPS guidance.

We are reiterating our UNDERPERFORM rating and 12-month price target of $18. Our target is based on an EV of 10x sustainable free cash flow, reflecting expected negative comps in FY:15, further margin erosion, low visibility, lack of clear guidance, and doubts about the sustainability of Best Buy’s turnaround plan. We expect comps declines to continue, and we expect price matching to continue to pressure margins. Lower margins could pressure Best Buy’s cash-flow multiple.

Michael Pachter is an analyst at Wedbush Securities. 

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