Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

Best Buy (NYSE:BBY) will report its 3Q2014 earnings on November 19 before the market open. These are results from August through October of this year.

Anecdotally, I assumed that BBY will have a very strong quarter, easily exceeding the consensus estimate of $0.11 per share.

My confidence stems from a number factors including:

1) Very easy year-over-year comps.

In 3Q2012, BBY reported comparable domestic store sales growth of a miserable -4.3%, not a difficult hurdle to pass given the improvements made so far this year.

2) Continued improvements in domestic comparable store sales

In 1Q2014, BBY reported domestic store sales of -1.1%. However, this included "the Super Bowl shifting into last year's 4Q as well as the decision to reduce sales in a number of non-core businesses." Excluding these items, domestic store sales were FLAT for the quarter, despite "no new product launches and late deliveries in the smartphone category."

In 2Q2014, the company reported that domestic store sales decreased 0.4% driven by "short term disruptions caused by the retail deployment of the Samsung Experience Shops, Windows Stores and floor space optimization as well as continuing the rationalization of non-core businesses." Excluding these items, domestic comp store sales were FLAT to SLIGHLTY POSITIVE in the quarter.

With the Samsung and Microsoft stores fully on-line after 2Q, we should expect both traffic and sales benefits from the concepts in 3Q.

3) Website performance has been impressive

In 1Q2014, domestic comparable on-line sales increased 16%. In 2Q2014, domestic comp on-line sales rose 10%.

BBY's website should continue to perform very strongly as more consumers realize the convenience of being able to buy on-line and pick-up at a local store in the same day.

4) Surge in product launches that began in August

Best Buy and other electronics retailers will benefit greatly from an unusually large number of product upgrades and launches in late 2013 including Apple's iPhone 5S and 5C, new iPads and MacBooks, Samsung's new smartwatch, its Galaxy mini, Ativ tablets and cameras, gaming consoles by Microsoft and Sony, 4G televisions...etc.

Those consumers interested in the plethora of new products can experience them at their local Best Buy. Unlike this time last year when BBY's "price match" policy was not in effect, consumers can purchase the products at Best Buy knowing that the price is the same as AMZN.

Monthly sales data

Empirically, my confidence in a strong quarter is further bolstered by the monthly retail sales reports.

Examining the U.S. Census Bureau's monthly sales data for the electronics and appliance category for August and September reveals a potentially strong quarter of sales growth for BBY measured on a year-over-year basis:

Let's examine how accurate the U.S. Census Bureau's monthly sales data in electronics & appliance stores is relative to the domestic comparable store sales reported by Best Buy in the preceding two quarters.

In 1Q2014, representing February, March and April 2013, BBY reported domestic comp sales of -1.1% (or flat, excluding the stated impacts).

The year-over-year sales in electronics & appliances reported by the Census Bureau were:

February = -1.8%

March = -4.9%

April = 3.0%

Simple average = -1.2%

In 2Q2014, representing May, June and July 2013, BBY reported domestic comp store sales of -0.4% (or flat to slightly positive post adjustments).

The year-over-year sales in electronics & appliances reported by the Census Bureau were:

May = 0%

June = -0.5%

July = -0.2%

Simple average = -0.2%

With this limited sample set, there is a very strong correlation year-to-date between Best Buy's reported domestic comp sales and the simple average of the annual sales change from the U.S. Census Bureau's monthly reports. (Obviously, to draw a statistically significant conclusion, one should back test the data with a much larger sample size).

For the upcoming quarter - August, September and October - annual sales in electronics & appliances are trending very strongly for the first two months, averaging an annual gain of 1.8%!

Though October may see a slowdown in overall consumer spending given the uncertainty related to the government shutdown, new product launches from Apple, Samsung, Sony, Microsoft and others in the electronics sector in September and October may continue to divert discretionary sales to the electronics stores in general and - with policies such a price matching and "shop on-line, pick up at store" - to Best Buy in particular.

Source: Best Buy: Monthly Retail Sales Data Bode Well For Best Buy