Best Buy Fights Gravity, But Stock Sells Off 5% Post Earnings

| About: Best Buy (BBY)
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Best Buy announced quarterly earnings this morning.

Revenue and operating income after-tax declined 4% and 38%, respectively, Y/Y.

At 14.0x LTM operating income after-tax, and 6.8x LTM EBITDA, Best Buy is a sell.

Picture: The movie "Gravity", source:

Best Buy Co., Inc. (NYSE:BBY) reported earnings today before the market opened. The company delivered fairly decent results given the softness in the market for consumer retailers. Revenue of $8.90 billion was just shy of the $8.99 billion analysts were expecting. Earnings per share ("EPS") of $0.42 beat expectations of $0.31. The migration of sales from bricks and mortar to online has exacerbated revenue of retailers like RadioShack (NYSE:RSH) and Staples (NASDAQ:SPLS). Going into earnings, it was clear that Best Buy's ability to fight gravity and grow online revenue as a hedge against reduced in-store traffic was key to its quarterly earnings. Below are the company's historical financial results:


  • Revenue declined 4% Y/Y and 2% Q/Q.
  • Domestically, comparable store sales were down 2% Y/Y, while online sales were up 22%.
  • Management estimated that online revenue as a percentage of total industry revenue was in the double-digits. That said, Best Buy still has room to grow its online revenue. For the previous quarter, the company's online revenue rose from 6% to 8% of total revenue.
  • Internationally, comparable store sales were down 7% Y/Y.


  • Gross margin declined to 23% in the quarter-ended August 2, 2014 from 27% during the same period last year.
  • Gross margin compression was caused by [i] discounting to drive foot traffic into stores and [ii] cost-conscious customers checking prices in retail stores, and then purchasing items cheaper online. Gross margin compression is not expected to abate anytime soon.
  • SG&A as a percentage of revenue was 20%, down from 22% a year ago. As sales and gross margin continue to decline, management is focused on aggressively managing SG&A expense.
  • The company cut costs equivalent to $40 million annually. Management expects to make more cost cuts internationally.
  • EBITDA declined 36% Y/Y to $385 million from $597 million in the year-ago period. EBITDA margin as a percentage of revenue also declined from 6% a year ago to 4% in the current quarter.
  • Net income declined from $0.77 per share to $0.42 per share. However, EPS exceeded expectations of $0.31 per share.


The stock was down $1.63 (5%) to $30.36 mid-morning, giving the company a $10.6 billion market capitalization. With $1.6 billion in long-term debt, the company has an enterprise value of $12.2 billion. Best Buy trades at 14.0x operating income after-tax through last 12 months ended August 2, 2014 ("LTM0814") of $757 million. Its enterprise value to LTM0814 EBITDA of $1.8 billion is 6.8x.


Best Buy's revenue and operating income after-tax declined 4% and 38% Y/Y, respectively. Its financial results and risk of future earnings declines do not justify its 14.0x P/E multiple and 6.8x EBITDA multiple. I rate the stock a sell.

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