Best Buy Company Inc. (BBY) reported first-quarter 2011 earnings on Jun 15 that missed the Zacks Consensus Estimate due to lower-than-expected comparable-store sales and higher selling, general and administrative expenses (SG&A).
Analysts have now had more than a week to digest the news. Below, we cover the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.
Earnings Report Review
Best Buy said that total revenues climbed to $10,787 million, up 6.9% from the prior-year quarter, reflecting the net addition of stores in the last 12 months, a 2.8% increase in comparable-store sales, and favorable impact of foreign currency translation.
Despite a sustained growth on the top line, quarterly earnings of 36 cents a share fell short of the Zacks Consensus Estimate of 50 cents, and also dropped 14.3% from 42 cents in the prior-year quarter. The increase in the top line was offset by a 6% rise in the cost of goods sold and a 12.3% jump in (SG&A) expenses.
(Read our full coverage on this earnings report: Best Buy Misses, Shares Tumble)
Earnings Estimate Revisions – Overview
Clearly, a negative sentiment is palpable among the analysts. Following the earnings release, the Zacks Consensus Estimate for fiscal 2011 has been on the decline. Despite management’s reconfirmation of fiscal 2011 earnings guidance, analysts have been chopping their estimates, disappointed by the first-quarter 2011 results and awaiting greater evidence about cost containment and steady sales trends.
After a sharp rise of 12.3% in the first-quarter 2011, management now expects SG&A expenses to moderate in subsequent quarters from the levels experienced in the first quarter, and anticipates a rise in the range of 6.0% to 6.5% for the fiscal year.
Despite lower-than-expected results, management remains optimistic about fiscal 2011 due to the increase in market share and growth in revenues, along with signs of improvement in the retail environment. Best Buy reaffirmed its earnings guidance of $3.45 to $3.60 per share for fiscal year 2011, reflecting an increase of 10% to 14% year over year.
The company said revenues in fiscal 2011 are expected between $52 billion and $53 billion, an increase of 5% to 7%. Comparable-store sales are expected to rise between 1% and 3%. Management also expects annual operating margin at 5%.
Agreement of Estimate Revisions
The table below indicates a negative inclination among the analysts. In the last 7 days, 8 out of 25 analysts covering the stock lowered their estimates for fiscal 2011 with none of the analysts raising their estimates. However, for second-quarter 2011, analysts clearly lack the direction with 4 analysts lifting their guidance, and 5 analysts chopping their estimates.
Magnitude of Estimate Revisions
The magnitude of estimate revisions indicates that Best Buy’s first-quarter 2011 disappointed the analysts and failed to lift investors’ confidence. Consequently, the Zacks Consensus Estimate has been falling since the earnings release. In the last 7 days, the Zacks Consensus Estimate for fiscal 2011 dropped 4 cents to $3.49, and now lies at the low end of the company’s guidance range. However, the Zacks Consensus Estimate remained stagnant at 47 cents for second quarter 2011.
Estimates for the second quarter 2011 range from a low of 39 cents to a high of 55 cents. For fiscal 2010, the estimates range from $3.35 to $3.74.
Best Buy Holds Zacks #3 Rank
Best Buy’s shares maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation. Our long-term recommendation for the stock remains ‘Neutral’.
The dominant position in the consumer electronic business enables Best Buy to sustain growth in the top line, expand store base, and boost market share. The company increased its domestic market share by 1% in the first quarter 2011. Best Buy has also been actively managing its capital and making prudent capital expenditures.
Another factor driving growth is Best Buy’s customer-centric operating model. The stores tailor their 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 its competitors.
However, the company’s customers remain sensitive to macroeconomic factors, including interest rate hikes, increases 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.
We notice that Best Buy witnessed a softness in gaming, music and movies during the quarter under review. The company also notified that it experienced a low-single digit decline in comparable-store sales in televisions, as the rise in the sale of television units was offset by falling prices.
For the near-term, shares of Best Buy may remain under pressure, weighed down by disappointing first-quarter 2011 results, and would give a contrary reflection about the company’s outlook.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
Read the full analyst report on “BBY”
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