Best Buy Disappoints Analyst Estimates and Outlook

Richfield, MN-based Best Buy (NYSE:BBY) is a leading retailer of consumer electronics, office products, entertainment software, home appliances and the popular computer repair service called ‘Geek Squad.’ The company has traditionally been known for its wide success at retail stores. Today, the Commerce Department reported overall retail sales rose 0.8% in November. Meanwhile, Best Buy’s quarterly report indicates a lag in sales relative to competitors this holiday season. Here’s the earnings breakdown:

Earnings: Dropped by 4% to $.54 per share, or $217 million, compared to $.53 per share, or  $227 million, in the same period a year ago.

Revenue: Decreased 1% to $11.89 billion, compared to $12.02 billion in the same quarter of the prior year. Revenue in stores open at least 14 months fell 3.3%.

Actual versus Wall Street Expectations: Earnings of $.54 cents per share missed expectations by $.07 cents.  The consensus analyst earnings expectation was $.61 cents per share. Revenue was far off the $12.45 billion revenue estimate (Thomson Reuters).

Notable Stats: Best Buy said that its same-store sales dropped 3.3% for the quarter, compared to a gain of 1.7% in the year-ago quarter.

Share repurchases totaled $420 million in the fiscal third quarter (approximately $1.1 billion in shares repurchased fiscal year-to-date).

Best Buy estimates that its domestic market share declined 110 basis points versus the comparable period last year for the three months ended October 31, 2010. The decline was driven primarily by declines in TVs, mobile computing and gaming software.

Best Buy lowered its guidance for the fiscal year to a range of $3.20 to $3.40 a share, compared to its previously announced guidance of $3.55 to $3.70. Analysts had been forecasting a profit of $3.59 a share.

Did You Hear That? Brian Dunn, CEO of Best Buy, stated, “While sales were lower than we expected during the quarter, I’m pleased with our strong store execution, solid gross margin expansion and efforts to control costs.”

Jim Muehlbauer, Best Buy’s EVP of finance and CFO said, “Based on lower than expected sales and earnings in the fiscal third quarter, and given our current visibility to potential outcomes in the fiscal fourth quarter, we now expect annual earnings to be below our previous fiscal 2011 EPS guidance. There remains a significant amount of business still ahead of us in the holiday selling season and we don’t have complete visibility to how customers will behave over the next several weeks.”

Commentary: Shares of Best Buy were riding the Santa rally until receiving a reality check at the time of their quarterly release today. After touching $45 per share on higher highs in November, shares are now down 20% from those highs in just a few weeks. Today’s drastic drop puts the current share price below both the 50-day and 200-day moving averages. During a reasonably better overall consumer climate than last year, Best Buy missed the opportunity to focus on the growing demand for online retail promotions. We see this quarterly report as a wake-up call to Best Buy management. Best Buy needs to become more adaptable to the consumer’s preferences. For shares to become attractive to investors once again, we think management needs to be a focused on returning to revenue growth.

Disclosure: No position in BBY.

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