Breaking It Down: Best Buy's Q2 2015 Earnings Call

| About: Best Buy (BBY)

Summary

Best Buy beat earnings estimates, but missed on revenue.

Expect same-store sales to continue to decline.

Management should have provided more details on store openings and closings and key product launches.

Background

On August 25, 2014, Best Buy (NYSE: BBY) reported Q2 FY 15 earnings of $146 million ($0.42 per share) on sales of $8.90 billion compared to earnings of $237 million ($0.69 per share) on sales of $9.27 billion in the same period in the prior year. These results were above Estimize-reported Earnings estimates of $0.33 per share, but below revenue estimates of $8.99 billion.

Best Buy is a global retailer of consumer electronics (31% of sales), computers and mobile phones (47% of sales), entertainment products (6% of sales), appliances (9% of sales), and services, such as extended warranties, service contracts, and installation (6% of sales).

It also provides servicing for computers through its Geek Squad service.

Its main competitors include Amazon (NASDAQ: AMZN), Wal-Mart (NYSE: WMT), and Target (NYSE: TGT)

Key Points

  • Same-store sales decline of 2.0%
  • Consumer electronics sales declined 2.5%
  • Gross margin 23% versus 27% in 2Q 2013
  • Store traffic continues to decline, online traffic is increasing
  • Opened 18 new Pacific Kitchen stores, plan to end the year with about 100 stores vs. 67 stores in the beginning of the store
  • Began offering installment billing for online sales
  • Domestic online same-store sales increased 22% to $581 million
  • Online revenue increased to 7.7% of sales versus 6.1% in 2Q 2013
  • Consumer electronics environment continues to be "soft"
  • 2.9% operating margin
  • Declines in mobile phones and tablets
  • Services declined
  • Softness in mobile phones, expect comparable sales to decline in 3Q and 4Q
  • 65% of revenue is from Consumer Electronics
  • The majority of open box inventory is purchased online
  • International revenue declined 12%, with same-store sales down 6.7%
  • SG&A was 20.2% of revenue versus 21.5% last year

Guidance

  • Same-store sales are expected to be down low-single digits

What to look for in Q3

Online Growth:

Online sales grew from 6.1% to 7.7% of total revenue. I'd expect this number to continue to grow as the company invests in its online sales business.

Positioning for Q4 and the holiday season

As a retailer that deals primarily in consumer electronics and handsets, the fourth quarter is crucial to its success. Management stated that sales of phones were down in the quarter ahead of new product launches, and they expect comparable sales to be down in both the third and fourth quarter.

Quick Take

Management spent a lot of time talking about improving the online business. Company leadership made it clear that they recognize that the company's brick-and-mortar sales are declining, but they were able to partially offset their retail sales with growth in the online business. Management clearly realizes that retail locations will continue to see less traffic for online shopping, and is attempting to make better use of its retail space by filling it with higher margin products.

I get a sense that the company is trying to pare down its standard retail store count while changing the existing stores to include Samsung and Sony Home Theater stores within those stores. The Home Theater stores have higher margin products that consumers are less likely to order online from places like Amazon, so it makes sense to use store space for these items.

While management provided a lot of details about operational performance, I was disappointed that they did not provide much guidance beyond same-store anticipated decline in 3Q and 4Q. Sales figures are important, but if sales are going to decline, I would like to be able to get an idea as to what the company can do to reduce SG&A expenses in order to maintain profitability. Management did not talk much at all about store openings and closures beyond Pacific Kitchen & Home, and its design center and home theater stores within the main Best Buy store.

I would also have liked to hear a bit more about their anticipated product launches. When I covered GameStop's (NYSE: GME) conference call, I remember that they were very specific about what products they expected to be major sales drivers going into the third and fourth quarters of the year. A bit more color from Best Buy's management here would have been nice.

Overall, this was a decent call following a somewhat disappointing quarter. Management gave pretty clear signals as to how they want to position the company: Invest in the online business, delegate retail space towards more high-margin products, and ensure that their stores are properly stocked.

Transcript is available on Seeking Alpha here, Conference Call audio and press release available here.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.