Will Best Buy Earnings Crush Its Stock's Rally?

Best Buy (BBY -0.81%) will release its quarterly report on Tuesday, and investors have a lot on the line in betting on the electronics retailer's turnaround efforts. But despite some substantial progress in its strategic plan, the numbers in the Best Buy earnings report could still look scary to shareholders who aren't prepared for the length of time it'll take the company to complete its recovery.

Retail is a fickle business, and trends can turn seemingly on a dime. Earlier this year, it appeared that many investors had written off Best Buy entirely as a victim of the transformation in retail away from huge big-box stores toward online offerings. Still, the company has a long way to go before its business fundamentals recover enough to justify the big move upward in its share price. Let's take an early look at what's been happening with Best Buy over the past quarter and what we're likely to see in its quarterly report.

Stats on Best Buy

Source: Yahoo! Finance.

Will Best Buy earnings take off this quarter?
Analysts have had narrowly mixed views in recent months on the prospects for Best Buy earnings, adding a penny per share to their current fiscal-year estimates but reducing their projections for next year by $0.03 per share. The stock has continued climbing, though, with a rise of another 25% since mid-May.

The disconnect between shareholder expectations and business fundamentals at Best Buy was pretty clear in the company's first-quarter report. Despite an almost 10% drop in sales as well as adjusted net income that dropped by more than half, shareholders celebrated efforts by the company to close unprofitable operations and cut costs, apparently expecting short-term pain to give way to longer-term financial health.

But Best Buy has made high-profile partnerships that have helped bolster confidence in the company. In June, Best Buy added Microsoft (MSFT 0.37%) to its growing list of mobile-device sellers offering in-house mini-stores under their roofs. With the initiatives essentially allowing Best Buy to share costs of maintaining its bricks-and-mortar operations with Microsoft, as well as fellow partners Samsung and Apple, Best Buy hopes that pulling more customers in will draw business to its own proprietary offerings as well.

Still, Best Buy's new emphasis on mobile isn't guaranteed to succeed. RadioShack (RSHCQ) has also turned to the strategy, and with its smaller-footprint stores, it's already in a better position to adapt to that format than Best Buy. Moreover, with mobile carriers having their own retail operations, competition will be fierce. Meanwhile, Amazon.com will continue to fence in the big-box electronics giant on the online side, while Costco and other warehouse retailers will cramp margin expansion opportunities on the bricks-and-mortar side.

In the Best Buy earnings report, watch to see if the company can get its earnings and revenue momentum moving back in the right direction. Shareholders have already priced in much of the company's potential rebound, so any signs of faltering could crush the soaring stock in short order.

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