How Bad Will Best Buy’s Earnings Be?

Rob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Best Buy (NYSE: BBY) is scheduled to release third quarter earnings on November 20.  Investors will be looking for an update on Best Buy’s attempt to turn around the business. However, Best Buy has already warned investors that they expect third quarter earnings to be significantly below last year’s. Management expects third quarter earnings to be effected by three things; lower comparable store sales, lower profit margins, and increased expenses.

 Declining Sales

Best Buy expects comparable store sales to decline in the same range as the first two quarters of the year. First and second quarter same store sales declined by 5.3% and 3.2%, respectively. Overall sales increased by 2% in the first quarter and declined by 3% thanks to an increased store count. Last year Best Buy reported third quarter revenues of $11.1 billion. Last quarter revenues at Best Buy decrease by 3%, but expectations from analysts expect revenues to decrease by 5% to $10.73 billion.

Compressed Margins

Gross margins are also expected to decline at a similar rate to the second quarter or 1.1%. That would bring Best Buy’s third quarter gross margins down to 24.5%, compared to 25.6% last year. Total gross margins based on analysts’ expectations would be $2.62 billion.

Gross margins are expected to contract due to product mix as well as product transitions due to upcoming product launches. Several key products are set to launch in the fourth quarter such as Windows 8, Wii U, as well as new iPads. These new products should help gross margins next quarter. However, management has announced they plan to offer free shipping and price matching on certain items during the holiday season. Investors will have to wait for management’s forecast for gross margin for the holiday quarter.

Increasing Expenses

Lastly SG&A expenses are expected to grow in the low single digits. Management cites an increase in spending on training and compensation to focus on improving customer service at the company’s stores. Last year’s SG&A expenses were $2.47 billion, even with a slight 2% rise this year’s SG&A expenses should come in at $2.51 billion.

The rise in SG&A expenses is largely related to investments to improve the customer experience. Management specifically cited increases in training expenses and compensation for sales associates as added expenses for the quarter. Best Buy needs to invest in the customer experience to stay relevant in a world with big box discount stores such as Wal-Mart (NYSE: WMT) and Target (NYSE: TGT). Wal-Mart and Target are both not only matching prices, but also plan on opening on Thanksgiving night to increase market share on Black Friday, the biggest shopping day of the year.

Best Buy also has to worry about online competitors such as Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY), who’s lower operating costs can lead to significant discounts for customers. Best Buy has often been called a showroom for online retailers and both eBay and Amazon plan to capitalize on that with smartphone apps such as Red Laser by eBay and Price check by Amazon to quickly compare prices and place orders.

The Bottom Line

This is definitely an investment period for Best Buy. Best Buy’s new CEO Hubert Joly is refocusing the business at the cost of near term profits. Best Buy’s third quarter operating profit looks to come in around $110 million, compared to $381 million last year. Earnings per share should also come in significantly lower in the range of $0.15-$0.17.

Investors will be looking for more information on Joly’s turnaround plans for next year. The focus on the customer experience at Best Buy is vital for their future, since competing on price with Amazon and Wal-Mart is ill advised. Hopefully the investments made now will pay off for investors in the future, though Best Buy’s turnaround may prove to be long and costly.

 


AllPrologue owns shares of eBay. The Motley Fool owns shares of Amazon.com and Best Buy. Motley Fool newsletter services recommend Amazon.com, Best Buy, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus

Compare Brokers

Fool Disclosure