Best Buy (BBY) isn’t walking into Thursday’s earnings announcement surrounded by a great deal of investor confidence.
The electronics retailer’s turnaround effort since CEO Hubert Joly took the helm three years ago has been a bit lethargic and uneven at times, and the headwinds stemming from competition seem to have firmed up even more this year.
Is the market simply being too pessimistic regarding the future of Best Buy stock, which has fallen nearly 20% since mid-September and is down by the same amount for the year so far? Or, is Best Buy poised to report solid third-quarter numbers and hit the ground running this holiday shopping season, sending BBY stock soaring?
Let’s just say the pressure is on the bulls at this time.
BBY Earnings Preview
As of the latest look, analysts collectively expect Best Buy to post a profit of 35 cents per share of BBY stock on revenue of $8.86 billion. The projected bottom line is a penny better than the 34 cents per share the company earned a year earlier, though the estimated top line falls 5.5% short of the $9.38 billion in sales the retailer drove in the third quarter of 2014.
Nonexistent revenue growth is a concern. Measurably declining revenue is an outright problem, spurring a lot of questions. The most important of them: Why is revenue expected to shrink for the third quarter?
The obvious answers are also the correct ones … increasing competition and fatigued consumers who, now several years into an economic recovery, may be growing a bit tired of the constant technology upgrade cycle of items like the iPhone and smart televisions; each new version of such devices seem to take a smaller leap forward than the last.
In an environment such as that, it becomes enormously important for Best Buy to distinguish itself from rivals such as Amazon.com (AMZN) and Walmart (WMT).
So far, it hasn’t, despite efforts to thwart “showrooming” and losing business from price-savvy customers who always know where to get a slightly better deal.
It’s unlikely things changed dramatically on that front last quarter.
Two Things That Could Impact Q3’s Earnings
While BBY stock is certainly going to be pushed around by the successes or failures of its electronics-retailing philosophy executed in the third quarter, there are two specific fiscal factors that may impact last quarter’s numbers on a one-time basis. Be sure to make the mental note before jumping to any major conclusions regarding Q3’s results.
In no certain order…
Cost Cuts: Cost cutting has been one of Joly’s biggest missions since becoming CEO, so there’s little doubt that he was once again looking to scrimp and save where he could last quarter. The questions are, how much did he save, and can those cost cuts be sustained?
The proof of the proverbial pudding will be in the profit margins Best Buy manages to report on Thursday. Operating margins have been mostly widening for the past couple of years, though capital expenditures have let net margins ebb and flow a bit. Either way, analysts mostly expect gross margins to be flat with the year-ago figure, which would actually be an improvement in light of the fact that it received a settlement in the third quarter a year ago that was counted as operating income. Look for any variation from expectations.
Integration of Future Shop: Though it technically happened in the first quarter, the costs associated with the integration of Future Shop and Canada’s Best Buy operation are lingering. Specifically, the company’s international revenue for the quarter could fall 30%, with profit margins possible turning negative to the tune of 3%.
That headwind will pass soon, however.
Bottom Line for Best Buy Stock
To the company’s credit, it’s turning a decent profit and is still in business years after many observers said it wouldn’t survive. BBY is also firmly profitable again after a few scary quarters of red ink in 2013.
But, the fact that earnings have only grown through cost cuts hasn’t escaped increasingly concerned owners of BBY stock who know the company can only do so much on the expense-reduction front. Eventually, to grow the bottom line Best Buy will also need to grow the top line. We may be at that point now, but Joly has yet to produce any sustained top line growth.
Last quarter isn’t expected to be any different.
If there are going to be any major mental hangups tomorrow morning after Best Buy reports Q3’s numbers, concern surrounding sales growth is likely to be the big one.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
