When consumer electronics retailer Best Buy (NYSE:BBY) reports earnings on Tuesday, expectations will be high. The so-far-successful turnaround effort led by CEO Hubert Joly needs to continue to show progress in order to keep investors happy. The stock has nearly quadrupled from its 52-week low, the kind of run that stokes fears of a serious correction. But analysts remain bullish, with UBS being the most recent firm to rate the company a "buy."
I'm also a Best Buy believer -- and a Best Buy investor since last year. Here's what I'll be looking for in Best Buy's earnings report.
Same-store sales amid Microsoft's store within a store
Same-store sales growth is one of the most important numbers for a retailer. Last quarter, Best Buy posted a decline of 0.4% in the U.S., but this was a great improvement compared to the decline of 1.6% during the same period last year. Joly pointed out that disruptions such as building out the Microsoft (NASDAQ:MSFT) stores within Best Buy locations contributed negatively to sales in the period. Backing out these items, Joly estimated that same-store sales were actually flat.
The Microsoft stores could turn out to be a big growth driver for Best Buy. With Intel releasing its Bay Trail line of low-power mobile processors, new tablets and convertibles running the full version of Windows 8 are priced at competitive levels. A few of these devices came out in time for Best Buy's third quarter, but the holiday season will have plenty more.
If Best Buy can return to same-store sales growth this quarter, then the worry that Best Buy's stock may have run up for no reason goes out the window. A more important test will be next quarter, but the launch of the new game consoles almost guarantee that same-store sales will grow.
If same-store sales decline more than last quarter, I'll start to get a little worried. The holiday season is the real test, though, and this quarter isn't nearly as important.
Continued cost cuts
One of the drivers of Best Buy's recovery has been an aggressive cost-cutting policy. Joly has turned Best Buy from a bloated mess into a far leaner company, and I'll be looking for further progress in this area. As of the end of the last quarter, Best Buy had eliminated $390 million in annualized costs, with the goal of eventually bringing this number to $725 million.
Much of the easy cost cutting, like removing layers of bureaucracy, is already behind the company. Progress will be slower going forward, but the goal of $725 million seems very reachable.
Acceleration of online sales growth
One of the areas being focused on by Joly is online sales. Best Buy has neglected e-commerce for years, and the company manages to convert only about 1% of visitors into buyers. This is half of the average among other retailers, so the opportunity is significant.
Best Buy has been revamping its website, and the ability for stores to ship out online orders directly is being tested at dozens of locations. Last quarter, online sales rose by 10.5% year over year, and this quarter, investors hope to see an acceleration of this trend. There's so much room for Best Buy to improve that sustained double-digit growth is not out of the question.
A possible blowout quarter
Last quarter, Best Buy blew away earnings estimates, posting $0.32 in non-GAAP EPS compared to $0.12 expected by analysts. This quarter, the average estimate is $0.11, and there's a very real chance that Best Buy blows this out of the water.
I don't think that the results this quarter will change the long-term picture very much, however. Next quarter is far more important, and a blowout next quarter will be far more meaningful.
While Best Buy is the only consumer electronics retailer with locations nationwide, there are smaller competitors, such as HHGregg (NASDAQOTH:HGGGQ). With only about $2.5 billion in annual revenue, HHGregg is tiny compared to Best Buy, but its recent weak earnings report caused shares of Best Buy to slump. On Oct. 31, HHGregg reported a 6.2% drop in same-store sales, with electronics sales dropping by 20%. This disastrous quarter caused its shares to drop by 17% as doubt was cast over the entire consumer electronics sector.
While HHGregg's results may foreshadow a poor quarter for Best Buy, they could also foreshadow a good one. HHGregg cited low demand for mobile phones, but nationwide that's not the case. Smartphone shipments are still growing, and it's possible that Best Buy is stealing away share. Best Buy has been building more of its mobile stores, and this could be eating into smaller chains' sales.
The bottom line
I expect to see continued progress in Best Buy's turnaround efforts when it reports earnings on Tuesday. Positive same-store sales growth would kill the argument that Best Buy's turnaround is all hype, positioning the company for a strong holiday season.
Timothy Green owns shares of Microsoft and Best Buy. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.