Best Buy: No Gifts For Shareholders This Holiday Season

Nov.21.12 | About: Best Buy (BBY)

Shares of Best Buy (BBY) took another beating on Tuesday. Shares fell 13.0% after the company released disappointing third quarter results before the opening. In the past trading week alone, shares lost almost a quarter of their value on poor operational performance and chance that founder Schulze may withdraw its offer for the firm.

Third Quarter Results

Best Buy reported third quarter revenues for its fiscal 2013 of $10.75 billion, down 3.5% on the year before. Lower revenues were driven by a 4.3% decline in comparable store sales. Revenues came in short of analysts expectations of $10.8 billion.

The troubled electronic retailer reported a net loss of $13 million, or $0.04 per diluted share, compared to a profit of $156 million in the third quarter last year. Earnings fell short of analysts expectations of $0.08 per share. Adjusted earnings per share came in at $0.03 per share, falling short of analysts estimates of $0.12 per share.

CEO Hubert Joly commented on the results,

In line with trends experienced over the last three years, Best Buy's third quarter financial performance was clearly unsatisfactory. On November 13, we shared our candid assessment of Best Buy's situation and unveiled Renew Blue, a set of priorities to begin re-invigorating the company's performance and rejuvenating Best Buy. The results we are reporting today only strengthen our sense of urgency and purpose.

Detailed Information

Domestic

Revenues for the domestic business fell 4.7% to $7.7 billion as a result of a 4.0% decline in comparable store sales. Online revenues rose some 10% to $431 million.

Operating income fell from $249 million last year to merely $50 million during the quarter. Earnings were under pressure on lower sales, lower gross margins and higher selling, general and administrative expenses.

International

Revenues for the international segment fell less than 1% to $3.1 billion. Comparable store sales fell 5.2% as strength in Europe was offset by weakness in Canada and China. The division reported an adjusted operating loss of $2 million on lower gross margins and higher selling expenses.

Valuation

Best Buy ended its third quarter with $309 million in cash and equivalents. The company operates with $2.01 billion in short and long term debt, for a net debt position of $1.8 billion.

For the first nine months of its fiscal 2013, Best Buy generated revenues of $32.9 billion. The company net earned $160 million, or $0.47 per diluted share. Full year revenues could come in close to $49 billion. Analysts expect Best Buy to report fourth quarter earnings of $600 million. As such, the company would earn around $750 million for the year, or $2.25 per share.

After Tuesday's dramatic declines, shares are valued at just $4.0 billion. This values shares at just 0.08 times annual revenues. Shares are trading at roughly 6-7 times annual earnings.

Best Buy paid a quarterly dividend of $0.17 per share, for the last time in September of this year. At this rate, the company's shares yield 5.7%.

Some Historical Perspective

Year to date, shares of Best Buy have lost half of their value. Shares rallied from $23 in January to highs of $28 in March on global market optimism. Shares slipped away on concerns about consumer spending and online competition from predominantly Amazon.com (AMZN) but jumped back to levels in the low twenties in August. Founder Richard Schulze submitted a proposal to take the company private. Deteriorating market conditions and doubts about the offer from Schulze send shares to levels around $12 at the moment.

Shares of Best Buy traded at all time highs around $60 in 2006 as consumer spending went through the roof. Home owners were taking out their home equity in order to buy electronic goods. Shares continued to slide from that point in time, despite the fact that the company grew its annual revenues from $45.0 billion for its fiscal 2009 to an estimated $49 billion for its fiscal 2013. The company reported a $1.0 billion profit in 2009 and is expected to be profitable this year.

Investors Are In Doubt

Best Buy's operational performance has been really bad into the so important holiday season, with Black Friday kicking off this Friday. Comparable sales declines of 4.3% during the quarter, fell short of expectations and the 3.2% decline in the second quarter. Investors fear that Best Buy is to follow Circuit City's footsteps who has already gone bankrupt. Other brick-and-mortar electronic retailers such as RadioShack (RSH) are suffering as well.

On the other hand, founder Schulze offered to pay $24-$26 for the company back in August, when shares traded around $20 per share. Shares are currently trading just below the $12 mark, making an offer around $25 unrealistic. Other investors fear that Schulze and the related private equity partners might withdraw an offer after all given the deteriorating operational fundamentals.

Investment Thesis

CEO Joly has made some changes, including the price matching offer which was announced last month. A little over half a year ago, I had a thorough look at the company's fate.

I concluded that the company is drifting, and unless Best Buy has a credible long term strategy, it will become less competitive by the day. I am not impressed with the improvements so far and I remain on the sidelines. If Howard Schulze sets his emotions aside, he will pull his offer.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.