We are reiterating our long-term Neutral recommendation on Best Buy Company Inc. (BBY) with a price target of $30.00.
Best Buy’s customer-centric operating model remains the driving factor behind its growth. The company tailors its store merchandising, staffing, marketing and presentation to meet the distinct needs of targeted customers. The company’s wide array of assortments, store formats and brand marketing strategies provide an edge over competitors.
Best Buy recently posted better-than-expected fourth-quarter 2011 results. The quarterly earnings of $1.98 per share topped the Zacks Consensus Estimate of $1.84 and rose 8.8% from $1.82 in the prior-year quarter.
Management now forecasts fiscal 2012 earnings in the range of $3.30 to $3.55 per share.
Best Buy said that total revenue tumbled 1.8% to $16,256 million from the prior-year quarter, reflecting a 4.6% drop in same-store sales, offset by the net addition of stores in the last 12 months. The total revenue fell short of the Zacks Consensus Estimate of $16,355 million.
For fiscal 2012, Best Buy projected revenue between $51 billion and $52.5 billion, reflecting an increase of 1% to 4%, and assumed comparable-store sales to be flat to a 3% decline.
Going forward, Best Buy intends to focus more on profitable sections, such as mobile, appliances and gaming. The company’s International business also provides opportunities for growth. It expects to strengthen the functions of the Best Buy brand in China with the Five Star division, and expand in new markets of Mexico and the United Kingdom.
Management aims to open 150 Best Buy Mobile stand-alone-stores in the U.S. and 40 to 50 Five Star stores in China by the end of fiscal 2012, bringing the total to 325 stores in the U.S. and 210 in China. Moreover, the company plans to open 6 to 8 large-format stores in the U.S. and a total of 18 stores in the United Kingdom, Mexico and Canada in fiscal 2012.
However, we still remain concerned about falling comps in televisions, and entertainment hardware and software categories, which registered a decline of a low double-digit in fourth-quarter 2010. Best Buy, which faces competition from Wal-Mart Stores Inc. (WMT), saw its domestic market share improve marginally on a sequential basis but declined when compared with the prior-year quarter.
The company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn the company’s growth and profitability.
Given the pros and cons we prefer to be ‘Neutral’ on the stock in the long-term. Best Buy also holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating, and correlates with our long-term recommendation.
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