Though back-to-school consumer spending may have played a role, things still seem to be looking up for leading electronics retailer Best Buy (NYSE:BBY).
Fiscal-2010 second-quarter revenue increased 12%, with the inclusion of the European segment and new store additions. Meanwhile, same-store sales slid 3.9% -- a substantial improvement from the prior quarter's 6.2% tumble.
On a category basis, the company cited sales gains in mobile phones, notebook computers, and flat-panel TVs -- good news for LCD manufacturer Corning (NYSE:GLW) -- versus sales declines in digital cameras, music, movies, and gaming. That final item likely comes as no surprise to shareholders of slumping video game developer Electronic Arts (NASDAQ:ERTS). Judging by the mix of category winners and losers, it appears that consumers are focusing on the electronics essentials.
As for the bottom line, earnings per share fell 22% year over year, to $0.37. The cause is twofold. First, operating profit margin narrowed on higher selling, general, and administrative expenses. The newly included European segment, which has higher operating costs in general, contributed to the margin compression, while steady fixed costs and lower same-store sales drove the remainder of the weakness.
Second -- and this is a reason for shareholder cheer -- Best Buy lost $0.03, or 7.5%, from EPS, but only because of a temporarily higher tax rate. The tax rate, fortunately, should fall for the remainder of the fiscal year.
In other good news, management estimated 2.7% of market share gain for the three months ended July 31. No doubt there'll be plenty of pundit commentary on whether those results should've been stronger in the absence of Circuit City. As for the rest of the year, management issued EPS guidance of $2.64 - $2.94. That represents a boost at the low and high end, something that not even consumer staples giant Procter & Gamble (NYSE:PG) could recently achieve.
With a forward P/E of 11.9, Best Buy shares look appealing, especially for risk-inclined investors. But keep in mind that the retailer hardly lacks competition. Target (NYSE:TGT) management recently mentioned electronics and entertainment as one area of retailing strength, and there's always the Wal-Mart (NYSE:WMT) threat looming in the background.
Moreover, consumer credit contracted at a record 10.4% annual pace in July, which is reflected in MasterCard's (NYSE:MA) 8% drop in transaction volume during July and August. Clearly, consumers aren't sharing the stock market's enthusiasm.
But as a play on an eventual recovery, Best Buy does look like one of the better bets.
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