Do Best Buy’s Earnings Matter?
Douglas 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 earnings results for the most recent quarter on Tuesday Nov. 20, but many investors are wondering if the numbers matter. While it is probable that either a significant beat or miss would cause a sharp move in the price of the stock, the news that is expected to accompany the earnings release is likely of significantly more importance. The two top questions that investors want answered are whether company founder Richard Schulze will make a play for the company and, if not, what plans newly appointed CEO Hubert Joly has for a successful turnaround.
By the Numbers
For the most recent quarter, analysts are expecting earnings of $0.14 per share and revenue of $10.75 billion. The figures represent the kind of year-over-year declines that symbolize the blows that Best Buy has taken. In the same quarter a year ago, the company reported $12.1 billion of revenue that translated to $0.47 per share of earnings. If you look at the chart below, you can see that the stock has given up nearly 50% of its value over the last year.
There are some fundamental bright spots for the company. Best Buy is currently trading at a forward P/E multiple of 3.66 and a PEG ratio of 0.94. Some analysts are looking at the stock as a deep value play, citing the need for a national electronics retailer. The most telling insight coming from these sources is the belief that as things stand, earnings growth must be driven by cost cutting as opposed to significant revenue growth. The low forward P/E is appealing, but unless the company can turn some kind of a corner, metrics alone will not save Best Buy.
The Turnaround Plan
Given Best Buy’s swan dive over the last few years, the task facing Hubert Joly falls somewhere between herculean and Sisyphean – you may not recall that Sisyphus was the figure from Greek mythology doomed to push an enormous boulder up a hill, just to see it roll back to the bottom again for all eternity. In addition to facing stiff competition from online retailers like Amazon (NASDAQ: AMZN), Best Buy has also had to contend with shifting trends away from high-margin items like TVs and full computer systems to lower yielding items like tablets and smartphones. The market is anxious to hear details of Mr. Joly’s plan in conjunction with the pending earnings release.
Interestingly, rumors have begun to swirl that where Best Buy is being gutted by Amazon, the online retailer might be an interesting buyer for the Minneapolis-based retailer. With Amazon having been recently kicked out of both Target (NYSE: TGT) and Wal-Mart (NYSE: WMT), the company lacks two important retail characteristics: the ability to allow consumers to examine its products in person and the infrastructure to make same-day sales. This is most applicable to Amazon’s Kindle devices, but applies to other items as well. If Amazon could leverage some physical locations – presumably far less than Best Buy currently operates – some useful functions could be met.
Given the tendency of consumers to use physical stores for showrooming –the practice of shopping for items in person and then buying them cheaper online – the move by Target and Wal-Mart makes sense. Also having expedited this eventuality was functionality on the Amazon devices that made comparison shopping while in one of the major discounters a streamlined process. If Amazon decides its needs some physical locations, an acquisition of Best Buy might be an interesting play.
The Return of the King
The other get-out-of-jail-free card that many shareholders are hoping for is a serious bid by company founder Richard Schulze. The expectation is that his consortium would bid in the low $20 per share range, which would represent a major premium to where shares are currently trading. Indications suggest that this type of move may be more realistic than originally believed and might provide a speculative reason to own shares.
The nightmare scenario for shareholders is a big earnings miss followed closely by any report suggesting that Mr. Schultze is balking. While the opposite case could spell big rewards for anyone with the stomach to take a real flier, the risk-reward profile does not appeal to me. I would pass on the stock until a significantly compelling reason to own shares is revealed.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Best Buy. Motley Fool newsletter services recommend Amazon.com and Best Buy. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!