The good news is, Best Buy (BBY) topped earnings expectations for the third quarter. The bad news is, that’s the only good news that could be ferreted out of Thursday morning’s Q3 results from the struggling electronics retailer.
Almost needless to say, patience on the part of BBY stock holders is growing thin. Optimism was high shortly after CEO Hubert Joly took the helm in mid-2012, as the bottom line started showing signs of improvement.
But with sales yet to grow under Joly’s tutelage and the earnings growth driven by cost cuts appearing maxed out, owning BBY stock has once again become an “adventure” shareholders didn’t ask for.
Rundown on Best Buy Earnings
But let’s start with the good news: Best Buy earned an adjusted 41 cents per share on sales of $8.82 billion, an improvement on the 34 cents per share of BBY stock reported in the same quarter a year earlier.
The top line, however, was more than 2% lower than the year-ago revenue total of $9.03 billion, coming up short of the $8.83 billion in revenue analysts were calling for.
The bright spots last quarter were computers and appliances, while tablets, phones and service revenues proved to be a drag on overall revenue — a headwind Best Buy isn’t facing alone, as innovation in consumer technology has hit a wall.
Same-store sales grew a paltry 0.5%, vs. expectations of 1.2% growth.
The bulk of the big pullback BBY stock suffered on Thursday, though, stemmed from its discouraging fourth-quarter outlook. The company reported it is expecting sales to be flat or slightly negative — as in a low single-digit drop — on a year-over-year basis, which will lead to a slight decline in operating income.
Time to Put Up or Shut Up
Best Buy defended the lackluster outlook by noting that 2016’s Super Bowl was being played a week later than usual, pushing back some of the television spending that would have otherwise materialized in the fourth fiscal quarter ending in late January.
However, it’s difficult to imagine one event being a game changer for the same quarter that generates more than a third of the company’s annual sales almost entirely because of gift-giving consumerism. The rationalization is more likely something along the lines of an attempt to buy some more time with frustrated investors.
To his credit, Joly has restored profitability. Income hasn’t grown for the past year though, suggesting there are no further cost cuts to implement as a means of boosting the bottom line. From here, if Best Buy is to grow profits, it will need to grow the top line — one thing Joly has yet to prove he can do.
In his defense, it’s a fierce market: Amazon.com (AMZN) continues to draw an increasingly larger shopping crowd, while Walmart (WMT) has successfully established itself as a pseudo-specialist in the consumer electronics arena. But all businesses face stiff competition sooner or later. It’s Joly’s job to figure out how to beat those other players.
He hasn’t yet. And, he may never actually do so.
Bottom Line for BBY Stock
Best Buy isn’t a bad company. It just isn’t a growing company, and that makes BBY a tough stock to own. Leaving investors to wonder whether Best Buy will ever return to its glory days from the 90s, even if it means new leadership?
Probably not.
Best Buy simply lacks what Amazon and Walmart both have — scale. Amazon, specifically, has the added benefit of not being forced to maintain physical stores. Either way, with an exceeding number of choices of venues to buy electronics and appliances, the online digitalization of music and an increasing disinterest in consumer technology upgrades (just to name a few), Best Buy simply doesn’t have anything in place to drive appreciable growth.
Joly gave it a great effort, but third quarter’s earnings once again underscore the core problems holding BBY back.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
