Best Buy Misses Wall Street Expectations
Before the market open Friday, Best Buy (NYSE:BBY) reported its December sales results (5-weeks ending December 31), with comps of down 1.2% (down 0.4% domestically, down 4.3% internationally), below our estimate of roughly flat. The company attributed lower-than-expected revenue to weak customer traffic, which was below expectations until the last week before Christmas. As in the past, Best Buy did not have a conference call to discuss results.
The company maintained FY: 12 EPS guidance of $3.35 – 3.65, which exclude $6.52 – 7.17 of net charges. We are maintaining our FY: 12 estimates for revenue of $51.5 billion, comps of down 1.5%, and EPS of $3.35, which reflect assumptions for improved domestic comps and worse international comps.
Domestic areas of comps growth included tablets and eReaders (both low triple-digit increases), mobile phones (20% increase), and Appliances. In addition, online sales were up 26% due to increased traffic and November share gains. Domestic areas of comps declines included gaming and digital imaging (both low double-digit declines), and TVs (mid single-digit decline). Weak international results were due to comps declines (Canada and Europe) and f/x fluctuations.
Weak gaming results likely reflect lost market share, not industry declines. We expect December software sales, released by NPD on January 12, to show positive growth for the fourth month in a row. We believe that gamers left Best Buy stores post-Black Friday after the end of most discounting and the use of the $100 credit for pre-ordering five games. Best Buy’s struggles mean GameStop (reporting holiday sales on January 9) likely continued to gain market share.
We remain cautious on Best Buy shares. Best Buy seems aloof to declining comps in CE and Entertainment, focusing on growth segments (primarily Computing and Mobile Phones). Also, Best Buy remains committed to a premium pricing strategy, preferring limiting earnings erosion over growing share. Without a major product upgrade cycle or a pricing revision, share losses will continue.
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.