Best Buy Earnings – Beat or Bust?

Consumer electronics giant beats on earnings estimates, revenue fall on weak mobiles and computers sales

Source: Company's Website
Source: Company’s Website

Best Buy Co. Inc. (NYSE: BBY) reported its Q1 FY17 financial results before the markets opened on Tuesday, May 24th, 2016. The largest consumer electronics retailer in the U.S. beat earnings estimates with $0.44 in earnings per share (EPS), compared to EPS of $0.37 in the same period a year-ago. The Company’s drive towards cost reduction and increasing efficiency helped it post a net income growth of 77.5% to $229 million from $129 million seen last year. However, the Company reported a 1.3% revenue decline for the third straight quarter to $8.44 billion against $8.56 billion in the comparable period last year.

Best Buy’s revenue shortfall resonates with the sluggish performance of the retail sector at large, despite a slight uptick in consumer spending in April 2016. Moreover, many U.S. brick-and-mortar retailers such as Wal-Mart Stores Inc. (NYSE: WMT), Macy’s Inc. (NYSE: M), and Target Corp. (NYSE: TGT) have been unable to ward off intense competition from online merchants like Inc. (NASDAQ: AMZN) and fast-expanding dollar store chains that offer competitive pricing with a shorter delivery time. On a positive note, Best Buy managed to avoid further revenue decline through a turnaround plan that has kept prices low.

Online revenue growth surprises

Domestic revenue slipped 0.8% to $7.82 billion in Q1 from $7.89 billion last year, owing to closure of 13 big-box and 24 Best Buy Mobile stores. There was no change in domestic comp sales; better performance in health and wearables, home theater, major appliances, and computing equalized lackluster sales in mobile phones, tablets, gaming, and Geek Squad services and extended warranties. Revenue from the international segment fell 8.1% to $614 million from $668 million last year. Surprisingly, domestic comparable online revenue grew by almost 24% compared with 5.3% growth last year, on the back of higher conversion rates and increased traffic. During Q1 FY17, domestic comparable online revenue accounted for 10.6% of domestic revenue or $832 million, up from $671 million last year when online accounted for 8.5% of total domestic sales. Consolidated comparable-store sales fell 0.1% as opposed to a 0.6% gain last year.

Over a conference call on May 24th, 2016, CEO Hubert Joly stated, “We are investing to make it easy for customers to learn about and enjoy the latest technology as they pursue their passions and take care of what is important to them in their lives. With our combination of digital, store and in-home assets, we feel we have a great opportunity to address key customer pain points, build stronger ongoing relationships with our customers and unleash growth opportunities.”

Rejig of top brass

Best Buy announced that Sharon McCollam, the Company’s chief administrative officer and chief financial officer, will step down from her position on June 14th, 2016. She will hand over the chief financial officer hat to Corie Barry, who currently serves as the chief strategic growth officer. McCollam’s chief administrative responsibilities, which include IT, procurement, pricing, real estate, supply chain and customer care, will be shared between Corie Barry, U.S. retail president Shari Ballard, chief merchant Mike Mohan, and services president Trish Walker. To ensure a smooth handover, McCollam will take on an advisory role within the company until January 28th, 2017.

Another major event during the quarter under review was the share buyback program announced by the Company back in February 2016. Best Buy had stated that it would repurchase $1 billion of its shares over two years. During Q1 FY17, the Company repurchased 3.2 million shares for $97 million.

Guidance for Q2 and full year

For Q2 FY17, the Company is forecasting flat revenue and comps, with earnings guidance in the range of $0.38 to $0.42 a share. Management forecasts Enterprise revenue between $8.35 billion and $8.45 billion and expects Enterprise and Domestic comparable sales to be flat during Q2 FY17. International revenue is projected to decline by 5 to 10% during the next quarter.

For the remaining three quarters of FY17, the Company has lowered its earnings guidance due to lowered Geek Squad service pricing and last month’s earthquake in Japan, which has impacted digital imaging inventory. Based on the current industry dynamics and the absence of a strong mobile cycle, the Company did not change its FY17 guidance, which includes flat revenue and non-GAAP operating income, with its share repurchase program spurring non-GAAP EPS growth.

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