Earnings Beat Sets Off Sucker’s Rally in Best Buy Stock

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Best Buy (BBY) is going to be sweating it out this summer — or at least until Apple (AAPL) and maybe some other smartphone and tablet makers give the troubled retailer something hot to sell.

Best Buy stock BBYTrue, Best Buy earnings exceeded analysts’ expectations by a wide margin. BBY even swung back to profitability for the second quarter in a row.

But revenue fell for a ninth consecutive quarter and will keep evaporating for a couple quarters to come, the company said. That means the cost cuts BBY is relying on to buoy the bottom line — and Best Buy stock — have to bear perhaps an intolerable load.

BBY revenue fell 3% to $9.04 billion in the most recent quarter, down from $9.35 billion a year ago. Analysts on average forecast revenue of $9.23 million, so Best Buy’s number obviously fell short, but even more worrisome than the BBY revenue miss was its sales outlook.

Revenue was weak in large part because Best Buy moved fewer smartphones and tablets. That’s because consumers are waiting on the sidelines in anticipation of big product launches this fall — like Apple’s iPhone 6. And until it has something must-have to sell, BBY says revenue will keep going in reverse.

Absent new product launches, Best Buy expects comparable-store sales to decrease to the low-single digits or even negative in both the second and third quarters.

Like last quarter, revenue is doing nothing to support BBY profitability or Best Buy stock. That’s an unsustainable model. And in addition to blowing it on revenue, BBY same-store sales retracted 1.9% when analysts were looking for a decline of 0.9%.

Best Buy Stock: Earnings Beat Isn’t Nearly Enough

On the bottom line, BBY swung to a profit of $461 million, or $1.31 a share. That’s a reversal from a year-ago loss of $81 million, or 24 cents a share. On an adjusted basis, Best Buy earnings came to 33 cents a share, well ahead of Wall Street’s estimate of 19 cents.

Best Buy stock rallied sharply on the earnings news. But even is most of that isn’t short covering, it’s a rally that won’t last. BBY’s depressing outlook for sales will make sure of that. After all, the only thing keeping BBY in the black as this point is an expense-reduction program charged with lopping off a billion dollars in annual costs.

Like last quarter, the return to profits was driven by costs cuts, not by moving more merchandise. That’s not something investors can count on to drive Best Buy stock over a longer period. At some point, Best Buy won’t be able to cut costs fast enough to maintain profitability if sales keep dropping.

Complicating matter is that BBY doesn’t just need to get revenue growing again. It needs to increase sales while still maintaining margins. If BBY has to cut prices to lure shoppers away from Amazon (AMZN) and Walmart (WMT), the resulting hit to margins could easily offset the benefits from cost cutting.

Selling more to make less isn’t going to do Best Buy stock any favors.

BBY is going to need to follow up a sluggish summer with a surprisingly strong fall and holiday sales to give Best Buy stock a shot at sustained gains.

If Best Buy can increase revenue while maintaining or growing margins, then by all means, shares should rally. That’s a turnaround that’s working.

But if BBY has to slash prices to drive those sales, it will have earned a pyrrhic victory at best.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/05/bby-earnings-best-buy-stock/.

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