Earnings Preview: Can Best Buy Continue To Fight Gravity?

Aug.26.14 | About: Best Buy (BBY)

Summary

Best Buy reports quarterly earnings Tuesday morning before the market opens.

For the quarter-ended May 3, 2014 Y/Y declines in revenue and EBITDA were 3% and 6%, respectively.

Shifts in sales from brick and mortar to online has exacerbated sales at retailers like Radio Shack and Staples.

Best Buy has been fighting gravity as its online revenue grew 29% Y/Y. Online revenue growth is key to it meeting revenue expectations of $9B.

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Picture: The movie "Gravity", source: strictlyautobiographical.com

Best Buy, Inc (NYSE:BBY) is set to announce quarterly earnings Tuesday before the market opens. The company is a multi-national retailer of technology products, appliances, televisions, digital imaging and entertainment products. Best Buy also offers technology support, repair and installation under the Geek Squad brand. The company distributes its products domestically and internationally primarily through Best Buy retail stores and "Best Buy Mobile" - its mobile telephone retail business. Analysts are expecting revenue of $8.99 billion and earnings per share ("eps") of $0.31. Below are the company's historical financial results:

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Revenue

  • Revenue is comprised of computing and mobile phones (48%), consumer electronics (30%), entertainment (8%), appliances (7%) and services (6%).
  • Revenue declined 3% Y/Y. Of the total, domestic revenue was down 2.1% due to lower economics from a new credit card agreement and about a 1% drop in same store sales. International revenue declined 10.5% due to store closures in China and the effects of foreign exchange rates.
  • The bright spot was online sales which increased 29% Y/Y. Other retailers like Staples (NASDAQ:SPLS) and Radio Shack (NYSE:RSH) have been reeling from the migration of sales from bricks and mortar stores to online. With online sales rising from 6% to 8% of total revenue, Best Buy has been able to fight gravity, unlike certain competitors.
  • Analysts' revenue estimates in the current quarter of $8.99 billion is flat Y/Y and Q/Q, respectively.

Earnings

  • EBITDA declined 6% Y/Y from $384 million to $361 million in the quarter-ended March 3, 2014. A revenue decline of 3%, gross margin decline of 1% and flat EBITDA margins Y/Y led to the 6% decline in EBITDA.
  • EPS of $0.31 for quarter-ended March 3, 2014 is equal to analysts estimates for the current quarter.

Valuation

  • Best Buy has an $11.1 billion market capitalization and trades at 10.4x net income through last 12 months ended May 3, 2014 ("LTM0514") of $1.1 billion. Excluding a non-recurring tax benefit of $281 million in quarter-ended May 3, 2014, the company's net income would have been $117 million and $730 million for quarter-ended May 3, 2014 and LTM0514, respectively. That said, the company trades at 15.2x LTM0514 earnings excluding the one-time tax benefit.
  • Including long-term debt of $1.6 million, the company's enterprise value is $12.7 billion. Best Buy also trades at 6.4x LTM0514 EBITDA of $2.0 billion and appears to be fairly valued.

Conclusion

Best Buy's revenue and earnings have been flat Y/Y. At 15.2x LTM0514 earnings and 6.4x LTM0514 EBITDA I rate the stock a hold into earnings.

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