Best Buy Has a Lot to Prove Tomorrow

It's hard to get excited about Best Buy's (NYSE: BBY  ) upcoming quarterly report.

Wall Street sees declining revenue and earnings when the troubled consumer electronics retailer posts its fiscal second-quarter results tomorrow morning.

Analysts see Best Buy earning $0.12 a share, less than half as much as it did a year earlier. Revenue is expected to post a 13% slide to $9.1 billion.

As one of three potentially problematic reports out of the retail space tomorrow morning, the real reason Best Buy stands out is because the stock has done so well despite the cascading fundamentals. Investors have been treated to a 156% pop so far in 2013, and that has to be stinging shorts that may have nailed the faltering financials.

To be fair, there are some good explanations for the retreats on both ends of the income statement at Best Buy.

A good reason for the 13% drop in sales -- accelerating from the 10% year-over-year decline in its prior period -- is that Best Buy did close dozens of underperforming stores during the same quarter a year earlier. It also unloaded its 50% stake in Best Buy Europe in April.

The sharper stumble on the bottom line is the result of margin-munching initiatives meant to make Best Buy more competitive to Amazon.com's (NASDAQ: AMZN  ) showrooming challenge.

It was a year ago tomorrow that Best Buy tapped Hubert Joly as its new CEO, and the first anniversary of that announcement will probably be noted during the call (even though the French Joly didn't start at the company until his visa was secured two weeks later).

His Renew Blue strategy has started to bear fruit as he has successfully grown online sales, improved the public's perception of the chain, and made the most of excess selling space by striking deals with Samsung and Microsoft (NASDAQ: MSFT  ) for "store within a store" additions.

Best Buy posted a comparable 16% uptick in online sales in its most recent quarter. That's still well short of the 22% growth that analysts see out of Amazon this year, but investors are comforted to see accelerating growth. There's a price to be paid there. You don't sell more to savvy online shoppers who can price the competition in a single click, and that helps explain why gross margins have been sliding. Shopping at Best Buy or BestBuy.com is a better deal for shoppers than it was a year ago, and that's why the market's cool with earnings going the wrong way.

Amazon taught the market that a company doesn't need to be expanding profitability to be growing, and that seems to be the lesson here with Best Buy.

The deals with Samsung and Microsoft have also been applauded by Wall Street. As books, CDs, DVDs, and video games go digital, Best Buy has a lot of excess space in its stores. Having the world's leading smartphone maker and software company setting up shop within its stores is cheaper than either Samsung or Microsoft opening up stand-alone mall shops that will go largely unnoticed (though Mr. Softy's trying to change that). Samsung and Microsoft can also make the most of Best Buy's traffic.

We'll naturally get updates on how those concepts are playing out since this will be the first full quarter of operations since those stores started to open.

Having the stock more than double heading into this report still makes Best Buy a risky bet to sell off on the news, but between Joly's turnaround strategy and a gradually improving economy, the actual report may not be as gloomy as the numbers suggest.

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