Best Buy Is Laughing at You

Who were the people that bid up shares of Best Buy (NYSE: BBY  ) to a fresh 52-week high yesterday?

The troubled consumer electronics retailer posted horrendous fiscal first-quarter results this morning. Best Buy won't tell you that. In fact, the press release's headline -- Best Buy Reports Better-Than-Expected First Quarter Results -- is one of the many inside jokes that investors will see as they explore the numbers.

It's true that the adjusted earnings of $0.32 a share did beat Wall Street estimates of $0.25 a share, but are we celebrating a 58% plunge in adjusted net income?

More importantly, how is a nearly 10% plunge in revenue better than the 8% drop that analysts were projecting?

Revenue slipped as the company closed down dozens of stores in the middle of last year and domestic and international comps declined 1.1% and 2.8%, respectively.

If you're ready for some laughs, follow me down the rabbit hole.

Best Buy argues that stateside comps would've been flat if the Super Bowl hadn't shifted into last year's fiscal fourth quarter. The company's decision to reduce sales in certain non-core businesses also kept comps down.

Let's tackle the Super Bowl first. The "pre-Super Bowl" sales phenomenon apparently took place during the holiday quarter, but the benefit during that quarter was just 35 basis points -- or 0.35%. The balance, then, would seemingly come from the company's decision to reduce sales, but wasn't it really the customer's decision to reduce purchases?

We can't argue that Best Buy was moving toward higher-margin products in its shift away from non-core businesses, because that certainly didn't happen. Gross profit margins shrank from 25.3% during last year's first quarter to 23.4% this time around, and that's with legal settlement proceeds padding that number this time around.

And -- once again -- let's clarify that when Best Buy tweaks conditions to arrive at "flat" comps, it doesn't mean that the average store would be selling as much as it did a year earlier. Best Buy adds online sales to its comps mix, and that 7% increase -- or 16% on a comparable basis given one fewer week this time around -- is divided into what is now fewer stores after the 49 springtime closures last year.

So why did Best Buy hit fresh highs this week when it's a shell of the company that it was a week ago?

The only growing product categories at Best Buy are smartphones and appliances. If mobile is so lucrative, why is RadioShack (NYSE: RSH  ) -- a company that put all of its eggs into the wireless basket two years ago -- losing so much money? Appliances are booming in popularity. It's part of the real estate revival. However, if investors want in on that, isn't it smarter to go for Conn's (NASDAQ: CONN  ) or hhgregg (NYSE: HGG  ) , where it's a bigger part of their product mix? Appliances accounted for 43% of hhgregg's sales this past quarter.

Best Buy CEO Hubert Joly has done an admirable job of shaving costs and unloading the company's problematic European business. Thinning gross profit margins prove that he's carrying through on his goal to pass on the savings to consumers in an effort to compete against cheaper and nimbler online merchants. However, this all ultimately adds up to a business where things may get worse before they get better.

A 52-week high just doesn't add up, and it's a joke that reasonable investors just don't get.

Knock knock
The brick-and-mortar vs. e-commerce battle wages on, with Best Buy caught in the middle. After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. How will new leadership perform? Will a smaller store format work out for both the company and its brave investors? Should you be one such brave investor? To help answer all these questions, The Motley Fool has released a premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report today.

 


Read/Post Comments (9) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 21, 2013, at 6:41 PM, reww1234 wrote:

    Earnings were good when you look at the results for more than 2 minutes. Fool is just amazon bulls! Your articles are becoming laughable.

  • Report this Comment On May 21, 2013, at 6:55 PM, mistacy wrote:

    Declining sales is what you have to look at. Aren't sales what keeps a business running? If they are declining, doesn't that tell you the business is rotting?

  • Report this Comment On May 21, 2013, at 8:08 PM, TMFBreakerRick wrote:

    Reww1234, how is a 58% decline in earnings good?

  • Report this Comment On May 22, 2013, at 6:28 AM, Shuckapeafarms wrote:

    Best Buy is living on borrowed time! There customer service is beyond comprehension- it's nonexistent! The rewards program is laughable at best. Like Crazy Eddie, Best Buy is just a matter of time-very poorly managed company!! Placing share holders above customers almost lies on the principle "BRAINDEAD"!!

  • Report this Comment On May 22, 2013, at 10:05 AM, TMFLomax wrote:

    I hadn't looked at Best Buy for a smidge of time, and when i noticed what the stock has done over just a couple months, I was shocked. Huh? Yeah, decline in earnings AND decline in revenue. How is any of that good?

    Thanks for the article Rick, since it definitely shows me I didn't *miss* some shocking recovery in the actual BUSINESS during, say, a month or two. Geez.

    Alyce

  • Report this Comment On May 22, 2013, at 12:04 PM, RoscoePColetrane wrote:

    Best Buy longs are laughing at you.

    So many articles from someone with no vested interest in the stock. Ha.

    The Fool really is run by a bunch of fools. Keep bashing in favor of your beloved AMZN...this thing just keeps going up.

    Let me learn you something...its not about PAST earnings. Earnings results are measured to consensus forward expectations.

    BBY adj. EPS of $0.36 versus $0.25 expected.

    Revenues including Europe of $10.8B versus $10.66B expected.

    So - YES - BBY did report better than expected results.

    Instead of focusing so much negative energy on bashing BBY all the time how about you Fools try to justify AMZN's rich valuation for declining sales growth.

    44x EBITDA to get 22% sales growth that's down from 36% the year before...now that's a joke!

  • Report this Comment On May 22, 2013, at 7:02 PM, oldengineer wrote:

    Well now we know who some of the "brave investors" are. However I don't understand why they are so belligerent. Let's remember we are all fellow investors whether we are brave or not.

    OE

  • Report this Comment On May 23, 2013, at 12:35 AM, lowmaple wrote:

    oldengineer: Well put!

  • Report this Comment On May 27, 2013, at 9:42 PM, ezPromQueen wrote:

    The Only part of Best Buy worth salvaging is the Geek Squad.

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