by Dan Burrows | February 27, 2014 12:02 pm
Best Buy (BBY) rose sharply after its fourth-quarter earnings release, but this was merely a relief rally over a terrible holiday selling season that didn’t destroy the bottom line — not a celebration of some newfound retailing skill.
As nice as Thursday’s rally may have been, the only thing that really matters is that BBY stock won’t be long for this world if sales keep falling the way they did during the all-important holidays.
Best Buy warned investors well ahead of time that it had a miserable Christmas, so the market was bracing for a worst-case scenario, which BBY managed to avoid. That’s all the rally means.
Sure, BBY stock had an incredible 2013, rising 236%. But that was essentially a relief rally, too, albeit one that lasted an entire year. Remember that Best Buy stock had a horrible 2012, and was priced for death. Last year’s rally was a reaction to Best Buy not dying — and even getting out of intensive care with the help of a turnaround plan that it believes will re-accelerate the business even as it punishes gross margins.
Best Buy is still very sick, however, and that makes BBY stock suitable for traders only. Best Buy stock might look like a value play, a stock you hold for at least three to five years. It’s not. At the rate it’s going, Best Buy won’t even be around in three to five years.
Best Buy stock was down more than 30% for the year-to-date before the latest quarterly earnings report. It’s pretty much out of the question that BBY stock can stage a repeat of 2013.
For the most recent quarter, Best Buy returned to profitability and beat Wall Street forecasts by a wide margin — but the way it did so is not a sustainable business model.
Net income from continuing operations came to $310 million, or 88 cents per share, in the fourth quarter, swinging back to the black from last year’s net loss $461 million, or $1.36 per share. Excluding special items, BBY earned $1.24 per share, well ahead of analysts’ average estimate of $1.01, according to a survey by Thomson Reuters.
The return to profits was driven by costs cuts tied to BBY’s turnaround plan, not by moving more merchandise, and that’s not something investors can count on to drive BBY stock over the longer haul.
Even after warning about revenue, BBY still managed to miss analysts’ average estimate. Quarterly revenue declined 3% to $14.47 billion vs. Street expectations of $14.66 billion. More worrisome is that comparable-store sales fell 1.2%, which further pressures margins.
Like the rest of the consumer electronics industry over the holidays, Best Buy had to lower prices amid falling customer traffic courtesy of Amazon (AMZN).
It’s an old saw, but it’s true: You can’t cut your way to growth, and cuts are the only thing propping up BBY stock these days. Best Buy said it has slashed annualized expenses by $765 million, exceeding its goal for $725 million in cost cuts.
However, firing workers and managers, closing stores and selling assets can’t go on forever. At some point, a retailer has to see sales growth, and cost cuts can make that harder to achieve. Best Buy is taking a scythe to its officer ranks, with plans to slash up to 2,000 middle managers, according to a news report.
It’s hard to see how that could help the top line. After all, anyone who has shopped there recently knows the one thing Best Buy stores don’t need is less organization.
BBY stock enjoyed a reprieve on fourth-quarter results, but the trend is still down. The weak holiday showing revealed Best Buy’s true colors. Costs cuts buy time, but what Best Buy stock really needs is sales growth.
As if this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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