Friday, June 10, 2011

Best Buy Co. Inc. (NYSE: BBY): Q1 Earnings Preview 2012

Best Buy Co. Inc. (NYSE: BBY), the largest U.S. electronics retailer, is scheduled to release fourth quarter earnings before the opening bell on Tuesday, June 14, 2011. Analysts, on average, expect the company to report earnings of 33 cents per share on revenue of $10.69 billion. In the year ago quarter, the company reported earnings of 36 cents per share on revenue of $10.79 billion.

Best Buy Co., Inc. operates as a retailer of consumer electronics, home office products, entertainment software, appliances, and related services. It operates in two segments: Domestic and International. 

In the preceding fourth-quarter, the Richfield, Minnesota-based cmpany's net income was $651 million, or $1.62 per share, compared to $779 million, or $1.82 per share, in the prior-year quarter. On an adjusted basis, the company earned $1.98 per share in the fourth quarter. Revenue declined to $16.26 billion from $16.55 billion in the comparable period in the same quarter last year. Analysts, on average, expected the company to report earnings of $1.85 per share on revenue of $16.27 billion. 

At its last earnings call in March, the company said that fiscal 2012 net earnings per share are expected to be in the range of $3.28 to $3.53; and adjusted earnings per share of $3.30 to $3.55, excluding the impact of the prior announced restructuring charges and potential fiscal 2012 share buybacks. The company expects fiscal 2012 revenue of $51 billion to $52.5 billion, an increase of 1 percent to 4 percent, including the inclusion of a 53rd week in the fourth fiscal quarter of 2012, which the company anticipates would favorably impact full-year revenue by 1.5 percent to 2.0 percent. Comparable store sales are expected to be flat to down 3%.

Best Buy has struggled in recent months, losing market share to online retailers such as Inc. (NASDAQ: AMZN) and big-box and discounters such as Wal-Mart Stores Inc. (NYSE: WMT) and Costco Wholesale Corp. (NASDAQ: COST).  The company has lost market share in three of its largest categories where it has the market-leading position: televisions, computers, and digital camera and camcorders. There also has been growing concerns that the company can’t fill its large store base as music, movies and games have all moved to download businesses. 

Faced with declining market share and comparable-store sales, the electronics retailer Best Buy Co. now plans to cut its big-box store square footage, expand in online sales and grow in the nonhardware area including services and connections. It intends to cut its U.S. big-box retail space by 10% over the next three to five years, generating annual savings of $70 million to $80 million. At the same time, it will increase its presence in stand-alone Best Buy Mobile stores, express kiosks and other formats. Best Buy has about 1,100 big-box stores, ranging in size from 20,000 square feet to 58,000 square feet for a total of 42 million square feet, according to the company Web site. It also plans to expand Best Buy’s online presence in the U.S., doubling its $2 billion online sales within 3 to 5 years. The company plans to increase its online-only assortment, add kiosk and product finders in stores and increase in-store pickups. It’s also added partnerships with companies such as Chase to allow their clients to purchase Best Buy products using their reward points, said Shari Ballard, an executive vice president. In addition to mobile business, the company said it also counts on other new growth categories including appliances, videogames, tablet computers and its exclusive brands such as Dynex and Insignia.

In March, the company announced that its plans to take a series of actions to improve financial performance of its International segment and to boost growth in key strategic businesses. Best Buy said that the restructuring actions will see it closing branded stores in China and Turkey as part of its plan to generate savings of up to $70 million by fiscal 2013. It currently plans to close nine branded stores in China, but intends to reopen two of them at a later date. Meanwhile, the company announced plans to exit the Turkey test market by closing all current operations in the country, including the company's two Best Buy large-format stores. Further, the growth plans will see the company making new store investments focused on the profitable growth platforms of the mobile business in the U.S. and its Five Star business in China. The company also announced plans to improve efficiencies in certain U.S. end-to-end supply chain operations in order to enhance customer service and reduce costs.  As part of its growth plan, the company plans to open about 150 Best Buy Mobile stand-alone-stores in the U.S. as well as 40 to 50 Five Star stores in growing markets in fiscal 2012 in China.The company also plans to open 6 to 8 large-format stores in the U.S., and about 18 Best Buy-branded large-format stores in Canada, United Kingdom and Mexico during fiscal 2012.These restructuring actions are projected to result in charges of $225 million to $245 million during fiscal 2011 and 2012. Majority of these charges, expected to be $210 million to $230 million with an expected impact to earnings of $0.33 to $0.36 per share, are expected to be incurred in the fourth quarter of fiscal 2011. It will also result in annual pre-tax net savings of up to $70 million by fiscal 2013, with about $40 million in savings amount to be realized in fiscal year 2012.

Still, Best Buy faces a significant uphill battle to regain market share. Television sales have been weak across the board, with entry-level price points declining steadily as more sellers enter the market and consumers slow to adopt new 3-D technology. 

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