Best Buy Co. Inc. (BBY, Financial) is slated to report its first quarter results for fiscal 2015 on 21st May 2015. With the consumer electronics retailing giant broadly perceived as a key indicator on the consumer and economic health, its results have a tendency to impact broader market gauges including the CME index futures, as well as that of other consumer electronics retailers, such as HHGregg Inc. (HGG, Financial), Aaron’s Inc. (AAN, Financial) and Conns Inc. (CONN, Financial).
Best Buy reported 1.3% year-over-year growth in revenues for the fourth quarter of fiscal 2015 to $14.2 billion on the back of progress made under the company’s Renew Blue Program. Although the figure fell short of the consensus estimate mark of $14.41 billion, Best Buy’s adjusted earnings from continuing operations for Q4 2015 stood at $1.48 per share, beating both the year-ago quarter’s earnings of $1.20 per share as well as consensus estimate of $1.36 a share. Further, Best Buy reported a 2% rise in comparable-store sales during Q4 2015, compared to a 1.3% fall during the year-ago quarter. Following the results Best Buy projected its growth in comparable-store sales to figure in the flat to negative low-single digits during the first half of fiscal 2016. The company also forecast a 30-50 basis points decline in adjusted operating margins during the first two quarters of FY2016. Best Buy shares are down 12.3% since the company’s last earnings report.
Renew Blue Program likely to improve bottom-line growth
Best Buy has been trying to reduce costs through its Renew Blue Program that heads into the second phase this fiscal. In FY2014, the program contributed to record savings of $1.02 billion on the back of divestures of underperforming overseas stores and shutting down of non-core business operations. The company is looking to save nearly $400 million during the next three years through the program that has helped improve Best Buy’s balance sheet in fiscal 2014 and turn it into a profit-making company. Since 2012, when the program was put into action, Best Buy has seen a drop in its debt-equity ratio, while EBITDA and cash from operations have improved significantly. The company’s current debt is $1.62 billion compared to its cash position of $3.89 billion. Consequently, Best Buy’s Q1 2015 results are likely to benefit hugely through the Renew Blue platform.
Concurrently, Best Buy has also been focusing on customer enrichment through in-store and online merchandise assortments, a step that is likely to help the company sustain its top-line growth going forward. For instance, the company plans to launch approximately 20 new Magnolia Design Centers in fiscal 2015, taking the total to 78 Design Center store-in-stores. With the home automation and entertainment market slated to grow at a strong CAGR of 11.4% to touch the $12.81 billion mark by fiscal 2020, Best Buy’s strategy to pursue the growth market by offering customers a tailored in-store experience is expected to reap benefits in the mid to long-term.
Canadian consolidation to push operating costs
On the downside, a section of experts feel that Best Buy’s consolidation of its Canadian operations could put a dent on its Q1 results. With the company planning to shut down 66 Future Shop outlets, a move that is likely to put pressure on overall revenues since the stores used to generate average annual sales of nearly $1 billion. Although the company expects to offset the losses by recapturing customers to its Best Buy branded outlets, the transition of the 66 outlets to the Best Buy brand is likely to push up operating expenses and consequently impact earnings for the first quarter as well as the full fiscal. Other challenges that face the company include a planned $200 million investment in enhancements of Best Buy’s Canadian stores during the current fiscal as well as slow growth at the company’s ecommerce business.
Final thoughts
Best Buy reported upbeat Q4 2015 earnings with strong growth in comparable-online sales. However, the company’s projection of flat sales during the first half of fiscal 2016 left investors disappointed. The company has beaten estimates by 13 cents in three of the last four quarters and had one 7 cents beat. Given the relatively stable consensus estimate of $0.29 a share in adjusted EPS for the quarter, the Best Buy probably needs to report earnings above $0.31 a share on revenues closer to $8.6 billion to be viewed favourably by investors. Although investors are sceptical about the company’s prospects following a downgrade by JP Morgan from "overweight" to "Neutral," experts opine that the company’s efforts at customer enrichment and the enduring impact of the Renew Blue Program will deliver the desired results. Best Buy shares have mostly traded in the $34-$41 range in the last three months, hitting a 52-week high of $42 in March 2015. The Best Buy stock carries a price estimate of $34.67 a share, and a "buy" guidance.