Is Another Earnings Beat in Best Buy's Future?

Consumer-electronics retailer Best Buy (NYSE: BBY  ) is set to report its first- quarter earnings before the bell on May 22. And based on the spread between the minimum and maximum analyst estimates for earnings, there's quite a bit of uncertainty. Best Buy had a mixed fourth quarter, with comparable-store sales declining by 1.2% while online sales surged by 25.8%. And the first quarter might end up looking similar. With retailers like Wal-Mart Stores (NYSE: WMT  ) having already reported disappointing results, it's unlikely that Best Buy managed to grow comparable-store sales during the quarter. Here's what to expect from Best Buy's earnings report.

What analysts are expecting
Analysts are expecting revenue to decline slightly, about 1.9%, compared the same quarter last year. Best Buy has been cutting prices in order to better compete, so a revenue decline may not necessarily mean that store traffic has declined as well. Turning to earnings per share, it's clear that there's a lot of uncertainty among analysts. The low estimate is just $0.11, and the high estimate is $0.28, putting the average at about $0.20. Best Buy has beaten analyst estimates for EPS for the past four quarters in a row, with the company beating by 22.8% in the previous quarter.

What to look for in Best Buy's earnings report
The first quarter was difficult for many retailers, with bad weather acting as a scapegoat for many companies. Wal-Mart, the world's largest retailer, reported earlier this month that its comparable-store sales in the U.S. had declined slightly, and EPS fell by 3.5%. What's worse, store traffic in the U.S. fell by 1.4% during the quarter, suggesting that consumers simply didn't shop at stores as much compared to the same period last year. Wal-Mart acts as a decent representation of the health of retailers as a whole, and its disappointing results don't bode well for Best Buy.

Best Buy has been making substantial progress in its turnaround efforts, however, and even if the company struggles to grow sales in the near term, profitability should continue to improve. Best Buy surpassed its target number of $725 million for its cost-cutting initiative, part of CEO Hubert Joly's Renew Blue strategy, last quarter, and now the company is pushing to cut costs by $1 billion in total. Much of the additional cost cutting will come from reworking how the company deals with returns, and I expect to hear about the progress of this initiative during Best Buy's conference call.

While total sales may decline, online sales have been a bright spot for Best Buy. During the fourth quarter, online sales rose by 25.8%; and with the company investing in its e-commerce channel, I expect to see online sales continue to surge. The rate of online sales growth accelerated during the fourth quarter, compared to 19.8% growth for the full year, so we may see additional acceleration during the first quarter.

Best Buy has already done quite a bit of work to boost online sales, such as revamping its website, expanding its rewards program, and shipping online orders directly from its more than 1,000 locations. Online sales are still a relatively small portion of Best Buy's total revenue, slightly less than 11% during the fourth quarter, but rapid growth is making it an increasingly important part of the business.

Returning cash to shareholders
Best Buy has now made seven consecutive dividend payments without an increase; and while a dividend increase during the turmoil of the early turnaround would have certainly been a bad idea, the balance sheet has become extremely strong. Best Buy had nearly $3 billion of cash at the end of the fourth quarter, likely more than it needs to effectively run the business; and with the current quarterly dividend of $0.17, or $0.68 for the full year, Best Buy only paid out about $240 million in dividend payments in fiscal 2014. Earnings per share estimates for the full year range from $1.64-$2.89, so even at the low end the payout ratio has room to grow.

Another use of the excess cash on the balance sheet could be a share-buyback program. With a market capitalization of $9.1 billion, a $500 million buyback program would allow the company to buy back 5.5% of the outstanding shares while having a minimal impact on the strength of the balance sheet. I wouldn't be surprised if Best Buy announced a share-buyback program sometime this year.

The bottom line
With the difficult retail environment during the first quarter, Best Buy will likely suffer a sales decline. However, online sales should continue to surge, and further cost cutting should continue to improve profitability. With the spread between analyst estimates for earnings so wide, there's plenty of uncertainty going into Best Buy's earnings report. But the long-term picture is what matters, and on that front Best Buy is on the right track.

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