Best Buy Company, Inc.
) posted third-quarter fiscal 2014 earnings of 18 cents per share
that surpassed the Zacks Consensus Estimate of 11 cents and was
higher than 4 cents earned in the year-ago quarter. The strong
performance came on the back of effective cost containment,
partly offset by soft top-line performance.
Including one-time items and discontinued operations, this Zacks
Rank #1 (Strong Buy) stock reported quarterly earnings of 16
cents per share, sharply up from the loss of 3 cents in the
comparable prior-year quarter.
Best Buy is undergoing a turnaround program that includes price
match policy, multi-channel strategy, multi-year cost reduction
program and closing of some big box stores. In the quarter, the
company succeeded in lowering its annualized costs by $115
million, thereby bringing the total reduction to $505 million out
of $725 million targeted from the North American business.
Management is undertaking a competitive pricing strategy and
making investments in areas such as online, mobile, the
multi-channel approach, optimum utilization of floor area and
refurbishment of its website (bestbuy.com) functionality. Best
Buy increased "buy online - ship from store" endeavors in more
than 400 outlets.
Moreover, the company is leaving no stone unturned in wooing
consumers and capturing incremental revenues, as evident from its
strategic initiative of opening "Samsung Experience Shops" within
its stores. Taking the initiatives further, Best Buy entered into
) to roll out "Windows Store" across its 500 outlets in the U.S.
with an additional 100 in Canada.
Best Buy remains hopeful of a good fourth quarter, especially in
the holiday season due to its festive merchandise as well as
marketing and shopping enhancement endeavors. Moreover, the
company expects to benefit from the highly anticipated launches
of the two gaming consoles PS4 and XBOX One in November.
Additionally, Best Buy has announced that its stores will open
early at 6:00 pm on Thanksgiving Day and will not be shut until
late evening on Black Friday. Also, the company noted that by
being open on Black Friday, it will incur increases in
promotional expenditure and store payroll, which will dent its
fourth quarter gross margin.
Best Buy also completed the divestment of its 50% stake in Best
Buy Europe to Carphone Warehouse Group, the joint venture partner
in the same, and received $526 million, net cash plus $123
million in cash from the sales of shares obtained on account of
The move will help this consumer electronic retailer to
concentrate more on its U.S. operations, which have been facing
stiff competition from industry bellwethers like
Wal-Mart Stores Inc.
). We believe that the step to offload stake in Best Buy Europe
would increase its return on capital deployed.
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Coming to the results, total revenue fell 0.2% to $9,362 million,
and lagged the Zacks Consensus Estimate of $9,373 million.
Comparable-store sales inched up 0.3% compared with a decline of
5.1% in the prior-year period.
Gross profit slid 2.6% year over year to $2,170 million during
the quarter due to weak top-line performance and increased cost
of goods sold. Gross margin contracted 60 basis points (bps) to
23.2%. However, adjusted operating income increased substantially
to $131 million from $36 million reported in the prior year
period, while operating margin expanded 100 bps to 1.4%.
segment revenues rose 2.3% to $7,847 million due to 1.7% increase
in comparable store sales. The comps managed to grow despite the
disruptions fueled by space optimization, opening of the Windows
Stores and the shedding of non-core businesses
Domestic online sales came in at $499 million, while comparable
online sales rose 15.1% driven by improved traffic, increased
average order value, higher quantum of online orders placed in
the retail stores, along with better inventory availability
through the company's ship-from-store and online distribution
center expansion endeavors.
Robust growth in mobile phone, notebooks and appliances was
witnessed during the quarter. However, this was offset by decline
in gaming, movies and digital imaging.
The segment's adjusted gross profit fell 0.3% to $1,849 million
during the quarter, while gross margin came in at 23.6%, down 60
bps due to higher costs related to product warranty, unfavorable
mix of mobile phone service plans and increased investments.
International segment revenues fell 11.3% to $1,515 million due
to closure of 15 big box stores in Canada and 20 similar stores
in China in the prior year, a decline of 6.4% in comparable-store
sales and unfavorable foreign currency fluctuations. The drop in
comps was due to sluggish demand for consumer electronics and
mobile phone inventory limitations in Canada.
The International segment's gross profit fell 13.9% to $321
million in the quarter, while gross margin shrunk 60 bps to
21.2%, reflecting lower margin product mix as part of revenues
generated from China and increased promotional activities.
Other Financial Details
Best Buy ended the quarter with cash and cash equivalents of
$2,170 million, long-term debt of $1,624 million and
shareholders' equity of $3,744 million.