We reiterate our long-term Neutral recommendation on
Best Buy Co., Inc
) with a target price of $28.00.
Why the Reiteration?
Best Buy is undergoing a turnaround program including a price
match policy, multi-channel strategy, multi-year cost reduction
program and closure of some big box stores. In the latest
concluded quarter, the company lowered its cost by $175 million,
in addition to $150 million reduced in the fourth quarter of
This helped the online and brick and mortar electronic
retailer post better-than-expected first-quarter fiscal 2014
bottom-line results, wherein earnings of 32 cents a share
surpassed the Zacks Consensus Estimate of 25 cents.
However, the year-over-year decline of 57.9% in earnings per
share was disappointing. Total revenue also dropped 9.6% to
$9,380 million, and fell short of the Zacks Consensus Estimate of
$10,791 million. Moreover, the company's margins and
comparable-store sales exhibited a dismal performance.
Best Buy's online sales performance remains a positive.
Domestic online sales jumped 7.1% during the quarter. We believe
that the company is leaving no stone unturned in wooing consumers
and capturing incremental revenue, as evident from its strategic
initiative of opening "Samsung Experience Shops" within its
It also entered into a similar agreement with
) to roll out "Windows Store" across its 500 outlets in the U.S.
with an additional 100 in Canada.
Best Buy had also entered into a contract to divest its 50%
stake in Best Buy Europe to Carphone Warehouse Group, the joint
venture partner in the same. The move would help this consumer
electronic retailer to concentrate more on its U.S. operations,
which has been facing stiff competition from industry bellwethers
Wal-Mart Stores Inc.
). We believe that the step to offload its stake in Best Buy
Europe would augment its return on capital employed.
Despite these catalysts, management cautioned that second
quarter gross profit and earnings would be weighed upon by
competitive pricing and investments made in areas such as online,
mobile, the multi-channel approach and refurbishment of its
website (bestbuy.com) functionality, which would not reap
benefits before fiscal 2015.
The pros and cons embedded in the stock are also well
reflected through the Zacks Rank. Best Buy currently carries a
Zacks Rank #3 (Hold).
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