I had noted in my earnings preview that the estimates of $0.51 on $7.84 billion in sales have come down during the quarter but the stock hasn’t. Now that even the lowered estimates proved too optimistic, the shares are headed down as well.
The difference between the better than expected top line and the worse than expected bottom line, according to the company, was that:
The gross profit rate for the first quarter was 23.9 percent of revenue, a 150-basis-point decline compared with a gross profit rate of 25.4 percent of revenue for the prior-year first quarter. A significant contributor to the year-over-year decline was the inclusion of the China business acquired last June, which carries a significantly lower gross profit rate. Domestically, the increase of lower-margin products in the revenue mix — particularly notebook computers and gaming hardware — also added to the decline. An increase in the products completing model transitions in the home theater area (resulting in markdowns) and lower profitability of computer transactions were also factors in the year-over-year decline in the gross profit rate.
Investors are being asked to believe that the margin pressures were related to the product mix, but the mix didn’t appear to change much: Entertainment software was 17% of sales instead of 18%, while appliances were 8% instead of 7%. Consumer Electronics was 43% in both periods and Home Office was 32% in both. Investors should rightly ask whether the “increase in products completing model transitions… (resulting in markdowns)” was due to the timing of model transitions or whether it was simply because consumers were only willing to spend if they were getting a great deal.
If one does believe the “model transition” story, apparently the models are expected to keep transitioning for the rest of the year as well:
Based on the first-quarter results and trends in revenue mix that we expect to continue, we now anticipate earnings per diluted share of $2.95 to $3.15. This range represents an average increase of approximately 9 percent, compared with the 53-week period of last year. Our earnings guidance continues to assume an annual comparable store sales gain of 3 percent to 5 percent. It also projects a nominal increase in the fiscal year’s operating income rate. This guidance includes gross profit rate pressure, driven by the sales mix, offset by SG&A savings and expense leverage.
Sounds to me like weaker consumer spending on the most expensive discretionary items.
BBY 1-yr chart: