Will Best Buy Surprise Investors Tomorrow When It Reports Earnings?

Best Buy (NYSE: BBY  ) could surprise investors when it reports fourth-quarter earnings tomorrow before the opening bell, though not in a good way. The big-box chain has struggled to find its footing lately in a retail landscape that's now dominated by online retailers such as Amazon.com  (NASDAQ: AMZN  ) . Moreover, if Best Buy's revenue results from the all-important holiday shopping season are any indication, it could be a rough year for the retailer.

From Best Buy to worst buy
The consumer electronics retailer release holiday sales figures last month that failed to impress. For the first two months of the quarter, Best Buy said same-store sales declined 0.8% because the company was forced to offer more holiday discounts in order to better compete with its rivals. For comparison, Wall Street was looking for a 2% rise in comparable sales in the period, according to TheStreet. "This investment in pricing did come with a higher-than-expected cost, and we now estimate our fourth quarter non-GAAP operating income rate will be 175 to 185 basis points lower than last year," said Hubert Joly, Best Buy's president and chief executive.

The challenging holiday season could also negatively affect Best Buy's full-year results, which the company reports tomorrow. That's because the holiday shopping season can account for as much as 40% of annual revenue for some retailers.

Moreover, Best Buy's upsetting holiday sales report highlights the competitive pricing environment that Best Buy faces as it attempts to defend its market share against Amazon. Keeping expenses low is easier for Amazon because, unlike Best Buy, the e-commerce giant doesn't bear the costs of operating large physical store locations. Nevertheless, Best Buy has done a good job of turning this weakness into strength lately.

Making every store count
As part of its Renew Blue turnaround efforts, Best Buy was able to use its physical storefronts as a defense against Amazon during the holidays. The retailer introduced its ship-from-store program at more than 400 Best Buy locations in the period, allowing online orders to be filled more quickly than ever before.

In fact, as my colleague Dan Moskowitz pointed out earlier this month, Best Buy actually delivered products faster than Amazon during the holidays. As a result, Best Buy was able to grow its comparable online sales as much as 23.5% during the holiday period. Still, beating analysts' estimates in Q4 won't be easy given the greater-than-expected investment in pricing the retailer deployed during the holiday quarter. As it stands, Wall Street is looking for quarterly earnings of $1.01, on revenue of $14.66 billion. This is significantly below analysts' prior profit guidance for earnings per share of $1.62 in the period.

Shares of Best Buy have fallen more than 36% so far this year, and investors could push the stock even lower if the company surprises to the downside in tomorrow's earnings announcement. Best Buy shares were priced around $25.57 in midday trading today.

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