What to Expect When Best Buy Reports Earnings

Source: Mike Mozart on Flickr.

Consumer-electronics retailer Best Buy (NYSE: BBY  ) is set to report its fourth-quarter earnings on Feb. 27. The company announced disappointing holiday sales last month, with same-store sales falling by 0.8% amid a difficult and highly promotional holiday season, and the stock was severely punished as a result. But, as I argued in a previous article, Best Buy's holiday was a setback, not a disaster, and same-store sales growth is not the only important number to consider.

With online retailers like Amazon.com (NASDAQ: AMZN  ) posing a constant threat, Best Buy has made significant progress in becoming more competitive. Here's what to look for in Best Buy's earnings report.

What analysts are expecting
Analysts are expecting revenue of approximately $14.7 billion for the quarter, down 12.3% compared to the same quarter last year. Store closings and the sale of Best Buy's European business in 2013 are the main drivers of this revenue decline, and analysts expect full-year revenue to fall to $42.7 billion, down from $49.6 billion in 2012.

Earnings per share are expected to come in at $1.01, representing a 35% decline compared to the fourth quarter last year. Analysts have revised this estimate down from $1.61 before the holiday sales announcement, a large shift that might be an overreaction. Best Buy has beaten analyst estimates significantly in the past three quarters, and while the company talked about a reduced operating margin caused by intense competition, another earnings beat isn't out of the question.

Important things to look for
Best Buy's holiday sales report wasn't all bad news, and the earnings report and accompanying conference call should shed some light on the continued progress of the company's turnaround. Best Buy actually gained market share during the holidays, according to the company, and its Net Promoter Score, a metric used to quantify customer satisfaction, has been rising ever since CEO Hubert Joly took the reins in late 2012. A 400-basis-point increase during the holiday period is a sign that Best Buy is taking the necessary steps to improve the customer experience.

Online sales surged 23.5% over the holidays, a significant acceleration compared to the 10% rise during the previous holiday season. Part of Best Buy's strategy has been a heavy focus on improving its e-commerce channel, and those investments look like they're paying off. One driver of this growth has been the company's ship-from-store initiative, whereby online orders can be fulfilled from online distribution centers as well as directly from stores. The program has expanded to more than 400 stores, turning Best Buy's physical retail locations into a key e-commerce asset; over the holiday period, Best Buy actually had a lower average delivery time than Amazon.

The fact that Best Buy achieved faster shipping times during the holidays compared to Amazon is important, as it shows that having physical retail locations can be an advantage. Best Buy has more than 1,000 potential online distribution centers, spread throughout the country, and while Amazon has been aggressively expanding its distribution network, Best Buy's ship-from-store program is something that an online retailer can never match.

The conference call should provide some details on the progress of the ship-from-store rollout, which still includes less than half of Best Buy stores in the United States. Another update to look for is the progress of Best Buy's cost-cutting initiative, part of Joly's "Renew Blue" strategy. The company cut an additional $45 million in annual costs in the fourth quarter through Jan. 16, bringing the total number to $550 million. And Joly's commitment to more quickly and deeply lower the cost structure, stated in the holiday sales release, suggests that the original goal of $725 million in cost cuts may be a conservative estimate.

These cost cuts will help reduce the negative effects of aggressive pricing and are necessary for Best Buy to remain competitive with its online rivals. One area offering ample opportunity to cut costs is reverse logistics, which includes returns, replacements, and damaged products. The company estimates that $400 million in annual losses are associated with reverse logistics; and on the third-quarter conference call Joly stated that the first quarter of this year will see an initial quantity of returned items and open-box inventory available online.

This represents one of the biggest opportunities for Best Buy to cut costs, and investors should look for a progress update during Best Buy's conference call.

The bottom line
Best Buy's holiday season was disappointing to be sure, but the company's earnings report should make it clear that the long-term turnaround story is still intact. Best Buy is becoming more efficient, focusing on e-commerce, and taking advantage of its physical locations in order to boost online sales. While profits in the short term will take a hit, the panic caused by the holiday sales numbers was extremely overdone.

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Read/Post Comments (4) | Recommend This Article (1)

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 February 25, 2014, at 10:42 PM, kingrube9 wrote:

    FYI...It's all a joke. Best Buy is cutting ALL stores to 3 managers and 4 supervisors (down from 4-6 managers and 7 supervisors). This is happening on March 3-4. In addition, they are closing 3 stores. Managers/Supervisors alike ALL know this same thing will happen in about 13-16 months. The next time will see 50-100 stores close.

    Best Buy will tell you what you want to hear, but this cut coming up will see pay cuts, 401K contribution reductions (already leaked), insurance cuts, etc.

    The end is nearing and we all know it.

  • Report this Comment On February 26, 2014, at 4:45 PM, marder1 wrote:

    Disappointing margins XMAS don't look to improve, and the tie goes to the 100% virtual stores, not the brick and mortar types. XMAS announcement saw $36 a share retrace to $22.5. Recovered to $25.5, stay tuned for a return to the $22.5 level and lucky to be.

    Best Buy is the next Compuserve. Remember them? No. Don't blame you.

  • Report this Comment On February 26, 2014, at 4:45 PM, mistacy wrote:

    A decline is a decline.

    1.5 years into its supposedly successful turn around,

    BBY is only showing signs of weakness.

    Go & point to e-sales as much as you want.

    This is not BBY bread & butter.

    & trying to take that away from Amazon

    will only make it more difficult for BBY

    to make money.

  • Report this Comment On February 26, 2014, at 10:02 PM, Cwright123 wrote:

    BBY simply cannot get away from being the ultimate showroom for Amazon and ebAy. It's hopeless for them. They want to improve moline sales? They're 9 years too late. And you don't need an MBA to know that, but it would help if their executives tried learning about corporate strategy a little bit. Do not chase the competition! Instead, differentiate! BBY is hopeless and will be chapter 11 in 2-3 years.

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