On May 21, Best Buy (BBY) reported 1Q2014 EPS of $0.29 on revenue of $9.38B. Consensus had expected EPS of $0.25 on revenues of $10.66B. Despite the consensus beat, the financial press had highlighted this revenue "miss" and the stock finished the day down 4.3%.
Interestingly, there was no revenue miss at all. There was, however, an accounting adjustment not reflected in consensus numbers.
Since BBY had announced the impending sale of their European operations, they recorded the attributable earnings as discontinued operations thereby removing all impact of Europe from the statement of earnings into a single line item, discontinued operations. Since the timing of the sale was so late in the quarter, consensus estimates had not made the adjustment.
As Best Buy CEO Hubert Joly noted on the earnings call and even later on a segment on CNBC, including the operations from Europe (and adjusting for other restructuring costs) for a comparison to consensus estimates, BBY's 1Q2014 revenue was $10.8B or 1.3% higher than consensus expectations of $10.66B. Moreover, the adjusted EPS of $0.36 was 44% above analyst expectations of $0.25.
Price Matching Impact
From the earnings transcript, Sharom McCollam noted that "the Domestic gross profit rate was 23.4% versus 25.3% last year, a decline of 190 basis points. This decline was primarily driven by a greater investment and price competitiveness including higher promotional activity in mobile and computing, higher inventory shrinkage and increased product warranty-related costs."
Effectively, being price competitive with their price match program is having the expected detrimental impact on margins. But how is it impacting sales growth?
Domestic same store sales were -1.1% but that was largely a function of Super Bowl sales shifting into 4Q2013 results. Excluding the calendar impact, domestic same store sales were flat, a significant improvement to the 3.7% decline seen in 1Q2013 results.
That's acceptable largely given that other consumer electronics retailers such as hhgregg (HGG) and RadioShack (RSH) had posted even worse comp sales metrics. So along with 4Q2013 results, the bleeding in BBY comp sales appears to have stopped.
But the recent flat comp is not that exciting. However, what is exciting is the performance of Best Buy's number one Renew Blue priority, on-line sales.
During the quarter, on-line sales were up 16%, well above last year's pace of a 10% gain. A 60% increase in the growth rate year-over-year is much more impressive. Is Best Buy's price matching initiative having the sought after benefit of increasing its on-line market share?
Given the limited amount of time that has transpired since BBY had implemented the program (4Q holiday season and two-thirds through 1Q), it may be too ambitious to identify a trend. However, examining the growth rates of Amazon's (AMZN) quarterly North American electronics sales may provide some insight on whether Best Buy's price matching program is in fact having the desired effect.
In 4Q2012, when BBY's price match was in effect, AMZN reported domestic electronics sales growth of 24%. The prior year period, with no BBY price match, the rate of growth was 51%. The decline in the growth rate was 53%.
In 1Q2013, again with BBY's price match for a portion of the quarter, AMZN reported domestic electronics sales growth of 28% compared to 44% in the prior year period when there was no BBY price matching. The decline in this comparative growth rate was 36%. Perhaps not as large a decline as 4Q due to the fact that the price matching was only in place for a portion of the quarter.
Year-over-year change in AMZN electronics sales with BBY price match:
1Q2013 = -36% (price match in place for portion of quarter)
4Q2012 = -53%
Average = -45%
Source: AMZN quarterly financials
Of course, as most investors that follow AMZN know, their domestic electronics sales growth rate has been decelerating since 3Q2011. Admittedly, it is nearly impossible to maintain an accelerating level of growth in perpetuity, even for Amazon.
So what can we decipher from the decline in annual domestic electronics sales growth rates during the periods preceding the implementation of Best Buy's price matching? The year-over-year change in AMZN domestic electronics sales prior to BBY's price match program:
3Q2012 = -30%
2Q2012 = -39%
1Q2012 = -30%
4Q2011 = -27%
Average = -32%
Source: AMZN quarterly financials
Though AMZN domestic electronics sales growth rates have been slowing for some time now, the rate of decline following Best Buy's price match has increased to -45% from -32%. Could it be that Best Buy's price matching initiative is accelerating the rate of decline? Much like the effectiveness of BBY's turnaround strategy implemented only two quarters ago, only time will tell.