Your Best Buy Holiday Sales Preview

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Best Buy (NYSE:BBY) will release holiday sales results (9-weeks ending January 5) on Friday, January 11. Similar to the past, Best Buy will not host a conference call, and will likely report before the market opens. Results will not compare directly to last year’s December sales, which included the five weeks ending December 31.

We expect the company to report holiday comps in line with our estimate of down 2.5% (down 2% domestically, down 4% internationally).  Although we think demand was weak and online competition eroded Best Buy’s market share, we think that aggressive promotional activity will allow comps to come in close to our estimate. It is likely that promotions caused consolidated gross margin erosion in line with Q3:13 (down ≈150bps year-over-year), 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, and we expect holiday comps to be underwhelming at best. We expect continued  comp declines through the end of FY:14, and believe the company will end the fiscal year with free cash flow at the low-end of its guided range, with further cash flow declines likely in the out-year.

We do not expect Best Buy to revise FY:13 guidance for free cash flow  of $850 million – 1.05 billion in its holiday release. We note that founder Richard Schulze continues to press for a private equity takeout of Best Buy, pending holiday sales, and think that he will…

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delay his bid again when results are released.

We are maintaining our Q4:13 estimates for revenue of $49.2 billion, while decreasing our estimate for EPS to $1.35 from $1.56 to reflect further margin degradation due to heavy promotional activity. We are likewise decreasing our FY:14 EPS estimates to $2.03 from $2.20.

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. We believe Best Buy has been unable to stem sustained comp declines and eroding margins, and remains at a significant disadvantage to its lower-priced and lower-cost peers.  Our price target reflects a EV/FCF multiple of ≈ 4x our revised FY:14 FCF estimate of $750 million, as we now view free cash flow as a more significant measure of the company’s viability going forward than P/E.

Michael Pachter is an analyst at Wedbush Securities. 

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