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Summary

  • The company registered a negative growth of approximately 4% in its top line during the second quarter of fiscal year 2015.
  • Comparable same stores sales plummeted by 2% in the US and 6.7% on an international level. The 22% growth in the comparable online sales reaffirms the shift in the consumer buying pattern.
  • Amazon is working on snatching the main business of Best Buy as the company’s electronics and general merchandise revenue skyrocketed by approximately 30% in the most recent quarter.
  • The company reported a positive earnings surprise of 13 cents per share on the back of its cost reduction initiatives and closure of stores.
  • Overall, the company prospects in the near term are downbeat and this stock may not be an ideal investment candidate for now.

Adapting to the shift in consumer behavior and shopping patterns is the major issue that Best Buy Co., Inc. (NYSE:BBY) seems to be grappling with these days. With the introduction of E-commerce, there has been a drastic shift in the way individuals have started to buy many products. Visiting brick and mortar stores to shop is becoming less fashionable nowadays as more and more people switch to shopping online which saves them the energy, time and to some extent, money as well. Competitors like Amazon (NASDAQ:AMZN) had started working on this shift long before Best Buy established an online platform to cater to the growing needs of clients.

Best Buy recently announced its second quarter results for the fiscal year 2015. Let's take a look at how Best Buy is handling this current issue and how it plans to deal with it in the future.

Recent Performance At A Glance

Top Line Hit

The company registered a negative growth of approximately 4% in its top line during the second quarter of fiscal year 2015 and reported absolute revenue of $8.9 billion, down from $9.3 billion in the same period a year ago. Comparable same stores sales plummeted by 2% in US and 6.7% on an international level. The double-digit growth of 22% in comparable online sales reaffirms the shift in consumer buying pattern as the company implemented its Renew Blue strategy which aims to expand its online business, increase in-store customer satisfaction, capitalize on multi-channel abilities, etc.

In a recent assessment conducted by Nielsen, it was deduced that 42% of the individuals are likely to purchase items like TVs and cameras online in the upcoming six months as compared to 15% during the prior year. Other online retailers are an open threat to the company's business and are attempting to snatch Best Buy's market share and ultimately, revenue.

The sale of computing and mobile devices is the major revenue generating item of Best Buy in the US (47% of total domestic revenue) and internationally (37% of total overseas revenue). Overall sales in the consumer electronics industry, which comprise of TVs, desktops, notebook computers etc, fell by 2.5% during the quarter. These items represent a major contribution to Best Buy's domestic revenue. Amazon is working on snatching the main business of Best Buy as the company's electronics and general merchandise revenue skyrocketed by approximately 30% in the most recent quarter due to its stronger online platform and better deals.

The discounting strategy adopted by operators in Canada and China is also hurting the company's sales growth.

Bottom Line Expansion

However, the company was able to maintain and elevate its bottom line as it actively pursued its cost reduction program. The company has cut down on its headcount and closed down inefficient stores in an attempt to build its cash reserves and make up for the shrinking revenue base. The cost cutting initiatives have resulted in a decline in the selling, general and administration expenses as a proportion of sales to 20.4% in the second quarter of fiscal year 2015 from 22% in the corresponding period last year. To sum up, this resulted in a positive quarterly earnings surprise of 13 cents per share.

Future Outlook

The launch of iPhone 6 in the following month along with the positive customer response to ultra high definition 4K televisions can provide a boost to the shrinking electronics industry. However, the effect of this growth is expected to be limited and may not able to turn the tables for Best Buy during the outgoing year. The company really needs to extensively work on expanding its online business and offer a differentiating experience to attract customers.

The company is planning on making an investment in the range of $40 million to $50 million during the remaining two quarters in order to perk up its shipping and order fulfillment.

Conclusion

Overall, the company prospects in the near term are downbeat for the very reason that sales need to grow for Best Buy to keep beating the analysts' estimates. Curbing unnecessary costs can elevate the profit to a limited extent and for a limited time.

Conducting a quick valuation of the stock based on the industry P/E "ttm" of 11.84x and consensus analyst EPS estimate of $2.29, the stock's intrinsic value is derived to be $27.11 which is slightly below the current market price of $29.80. At the moment, this stock may not be an ideal investment candidate.

Source: Best Buy: Near-Term Outlook Is Downbeat