Revealed: Best Buy Holiday Sales Results
The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Before the market open Friday, Best Buy (NYSE:BBY) reported its holiday sales results (9- weeks ending January 5), with comps of down 1.4% (flat domestically, down 6.4% internationally), above our estimate of down 2.5%. Best Buy attributed the comps improvement domestically to its holiday selling strategy, which included better product assortment, employee training, and a price match strategy. Mobile phones, tablets/eReaders, and appliances had positive comps, while entertainment, TVs, and computing declined. Internationally, Canada and China were weak. As in the past, Best Buy did not host a call to discuss results.
Best Buy lowered FY:13 free cash flow guidance to ≈ $500 million from $850 –1,050 million, citing lower accounts payable assumptions. Accounts payable are assumed to be down y-o-y from earlier payment of inventory purchases and a shift in sales mix to higher-velocity merchandise with shorter payment terms. However, according to the company, comps, gross margin, earnings and inventory levels were in line with assumptions that supported the earlier forecast.
We observed aggressive promotional activity during Q4, which we believe kept comps afloat, likely at the expense of margins. We are modeling consolidated Q4 gross margin erosion of…
170bps, slightly above Q3:13 levels, although the magnitude of the decline is only a guess. While Best Buy matched online pricing through the holidays and ran multiple holiday promotions to drive traffic into stores, we saw only marginal improvement in conversion rates.
We are increasing our Q4:13 estimates for revenue to $16.5 billion from $16.3 billion but are maintaining our estimate for EPS of $1.35. Despite the better Q4 comp, we believe that the unfavorable revenue mix negated any EPS upside due to further margin compression. Domestically, lower-margin CE contributed higher revenue, while higher-margin Services contributed lower revenue than we expected. Internationally, CE actually increased while Computing & Mobile actually decreased as a percentage of revenue. Our FY:14 estimates remain unchanged.
We reiterate our UNDERPERFORM rating and $9 price target, which reflects further operating margin erosion, low visibility, lack of FY:13 guidance, our view that a takeover is unlikely, and our doubts about the company’s turnaround plan. Our price target reflects a EV/FCF multiple of ≈ 7x our revised FY:14 FCF estimate of $450 million, as we now view free cash flow as a more meaningful measure of the company’s value than P/E.
Michael Pachter is an analyst at Wedbush Securities.
Investing Insights: Best Buy Adds to Mixed Retail Picture.