Shares of Best Buy (BBY) have witnessed a pullback in Tuesday's trading session after the troubled electronics retailer reported its first-quarter results before the market open.
Despite a 4.4% correction on Tuesday, shares have already more than doubled so far in 2013, making shares a bit too expensive for me, despite the ongoing operational improvements.
Best Buy generated first-quarter revenues of $9.38 billion for its fiscal 2014, down 9.6% on the year before. Revenues have fallen as a result of the fact that the first quarter last year contained 14 business weeks, compared with 13 weeks this year. The extra week added some $735 million in extra sales last year.
Revenues fell as well on the back of a 1.3% decline in comparable store sales, store closing and a re-classification of its European operations. Following the sale of a 50% stake in the business, the activities are classified as discontinued operations.
Best Buy reported a net loss of $81 million, or $0.24 per share, which compares to a profit of $0.46 per share in the corresponding period last year. Adjusted earnings, which exclude a $178 million charge due to discontinued operations, came in at $97 million, or at $0.29 per share. Earnings excluding restructuring charges came in at $0.36 per share, ahead of consensus estimates of $0.25 per share.
CEO Joly commented on some developments:
As expected, first quarter domestic comparable store sales were down 1.1%. This was the result of the Super Bowl shifting into last year's fourth quarter as well as our decision to reduce sales in certain non-core businesses. Excluding these impacts, domestic comparable store sales were flat for the quarter despite no new major product launches and late deliveries in the smartphone category.
Looking Into The Results
Best Buy had a tough quarter, but not necessarily as bad as some were expecting. Results furthermore came in ahead of the company's own expectations.
Gross profits fell by 190 basis points to 23.4% over the past quarter as a result of an increase in price competition, higher promotional activity and higher warranty-related costs.
While absolute selling, general and administrative costs were falling, they rose by 20 basis points to 20.7% of total revenues. Adjusting for the extra working week in the first quarter last year, expenses fell by 10 basis points on the back of tight cost control.
Operating income came in at $168 million, or 1.8% of total revenues. As a result of lower gross margins, operating income fell by 70 basis points on the year.
Best Buy ended its first quarter with $908 million in cash and equivalents. The company operates with $1.69 billion in short and long term debt, for a net debt position of almost $800 million.
The company reported full-year revenues of $45.1 billion for its fiscal year of 2013. The company reported a $441 million loss for the year.
Factoring in the 4% correction in Tuesday's trading session, the market values Best Buy at $8.7 billion. This values the firm at merely 0.2 times annual revenues.
Despite its financial difficulties, Best Buy paid a quarterly dividend of $0.17 per share over the past quarter, for an annual dividend yield of 2.6%.
Some Historical Perspective
Long-term shareholders in troubled Best Buy have suffered from pressure on retail spending, but even more so from online competition from the likes of Amazon.com (AMZN) and Wal-Mart (WMT). After peaking at levels in their high 50s back in 2006, shares have fallen to lows of $11 during the holiday period of 2012.
Despite an absence of a takeout offer from founder Schulze shares have more than doubled to current levels around $26 per share.
Between its fiscal 2010 and 2013, Best Buy has reported a cumulative 9% decline in total revenues. Revenues fell from $49.3 billion in 2010 to $45.1 billion in the meantime. Profits fell from $1.32 billion in 2010, as Best Buy reported a $441 million loss over the past year.
Shares of Best Buy have already more than doubled in 2013, as the company's price matching strategy and strict cost control have boosted enthusiasm among customers and investors.
Back in December, when a takeout from founder Schulze appeared to be imminent, I took a look at Best Buy's prospects. At the time I thought that investors should hope for a takeout given the lack of a credible strategy. While a take-out has not (yet) materialized, the price matching and aggressive cost-cutting strategy, also known as the Renew Blue priorities, has resulted in renewed enthusiasm.
Best Buy underperformed in the consumer electronics area where it could not compete sufficiently. Domestic comparable sales fell by 11.5% in that particular product category, offset by a 7.4% increase in sales of computing and mobile phones, driven by the deal with Samsung.
Adjusted comparable same-store sales declines of 1.3% have shown a large improvement over last year, when they fell by 5.2%. Other bright points are a 16% increase in online sales, higher consumer ratings, a successful agreement with Samsung in its retail stores and a continued decline in selling, general and administrative costs. A bright spot is also the divestiture of a 50% stake of its European operations for $775 million, even though this result in short term profit charges.
Domestic comparable-store sales fell by 110 basis points on the year, mostly driven by the adverse timing of the Super Bowl and the absence of product launches. Adjusting for this, domestic same-store sales came in flat, which is a huge achievement. The company already cut $175 million in annual costs, mainly on selling and general expenses since March of this year, cutting costs at a rate of $325 million per year. The company thinks it can achieve $400 million cost cuts in selling, general and administrative costs.
Investors are careful as the second-quarter results could be impacted from disruptions related to the roll out of Samsung Experience Shops within its stores, as well as the impact of the Renew Blue capital program.
Still, Best Buy is making progress in halting the revenue declines, while making rapid progress on cost cuts. The improved performance of the online operations, increased customers service and more competitive prices put the company in a better competitive spot. Promising as well, Best Buy already sees a benefit in states were online retailers like Amazon.com now have to pay state sales taxes.
Tuesday's sell-off is related to the cautious comments for the current second quarter, but underlying improvements remain visible, resulting in a doubling of the share price in a matter of months.
While a promising start has already been made, there is still a lot of progress to be made. At these higher levels in the share price, I remain on the sidelines for now. After shares have already more than doubled in a time period of just a few months, I see little room toward the upside in the short run.