Best Buy Plummets 30%, Is Better Sell Following Abysmal Holiday Sales Update
Despite several apparently well respected sell-side shops proclaiming that all would be well, the electronics warehouse missed comps (Sales at stores open at least 14 months were down 0.9 percent in the US (compared to expectations of +2.0%) and is being punished. Revenues fell 2.6% for the comparable period also. Shares are down 30% in the pre-market to 7-month lows as the company claims an "intensely promotional holiday season." It seems, perhaps, that following several other retailers' earnings updates the holiday season was even worse than many had expected (especially in the bricks-and-mortar stores that actually employ real people).
From the conference call:
- *BEST BUY SURPRISED BY CONSUMER ELECTRONICS MARKET DECLINE DEC.
- *BEST BUY: PRICE CUTTING WILL CONTINUE IN JANUARY
- *BEST BUY: HIGHEST DISCOUNTS IN TV, MOBILE AND COMPUTERS
What did not work:
... our holiday revenues were negatively impacted by a number of factors, including: (1) the aggressive promotional activity in the retail industry during the holiday period, which we believe did not result in higher industry demand and had a deflationary impact on our revenue; (2) supply constraints for key products; (3) significant store traffic declines between “Power Week” and Christmas; and (4) a disappointing mobile phone market
But there is hope:
“Looking ahead, our holiday performance reinforces our resolve and our sense of urgency around our transformation. As a result, our key priorities going into fiscal 2015 are: (1) to more quickly and more deeply lower our cost structure; (2) to grow our online channel at an accelerated pace; (3) to continue to improve and innovate the multi-channel customer experience; (4) to enhance our marketing approach and effectiveness, particularly relating to personalization, targeting of customer segments and buying occasions; and (5) to reinvigorate and grow our Geek Squad services business. We will keep you updated on our progress on these initiatives throughout the year.”
In defense of our market share, and from a financial perspective, we made a significantly greater-than-expected year-over-year investment in pricing in the holiday period as Hubert previously discussed, and are projecting to continue to invest through the end of the quarter. In addition to this earnings impact for the fourth quarter, our Q3 FY14 earnings release quantified an additional impact that was estimated in the range of negative 60 to 70 basis points as a percentage of revenue versus last year’s fourth quarter (Q4 FY13) non-GAAP operating income rate of 5.7%. This range was comprised of the following: (1) the negative impact of pricing investments; (2) the negative impact of our $150 to $200 million in FY14 incremental Renew Blue SG&A investments; (3) the temporary negative impact of our mobile warranty costs; and (4) the negative impact of the economics of our new credit card agreement; all substantially offset by the positive impact of our $505 million in annualized Renew Blue cost savings. Now as a result of all of these impacts, partially offset by substantially better-than-expected “non-Renew Blue” cost reductions, we expect our fourth quarter non-GAAP operating income rate to be 175 to 185 basis points lower than last year’s (Q4 FY13) 5.7% non-GAAP operating income rate, excluding the impact of such items as restructuring charges and asset impairments.”
So just BTF30%D then?
But nobody is more embarrased this morning than Credit Suisse retail analyst Gary Balter who said the following just yesterday:
Best Buy: Still Our Best Buy
Best Buy will provide a holiday sales update tomorrow, in the midst of other retailers falling well short of expectations so far this Christmas season. This has led to a continued selloff in BBY's stock, a sharper selloff than even some retailers that have reported misses, as there has also been a share of profit taking after BBY's 237% gain last year. As we detail in this note, we believe the bad news may be already in this name.
No Gary, they are not.
It is not that we think that BBY had a blowout Christmas season, as we detail below, we believe sales were fine but margins are the unknown. However, we are here for a longer-term turnaround and the stock valuation, we believe, does not reflect that potential. The stock trades at 5.2x 2014 consensus EBITDA, and we believe, after a first half of investing, we will begin to see the benefits of the changes in the second half of 2014 and beyond. Among those changes are a better web presence, which is still not there, reducing losses in product returns, developing a consistent consumer loyalty and credit card program, and furthering retail vendor partnerships. These are multi-billion dollar opportunities and will play out over a few years period.
We remain in here for the long haul assuming the company continues to take advantage of the low hanging fruit still available to it. While Q4 may have been a bump in the road (again, we don't think so), this story, combined with AAP, remain our best risk/reward names in 2014. We appreciate those investors that want to wait for the number as nearly all releases have sent stocks lower this season, but past Thursday absent some major change in direction, this is a place to be in 2014.
That's great, there is only one problem: this is not Amazon, where this kind of disappointment would lead to a 10% surge in the stock - this is an old school retailer where profits and traffic actually matter. Better luck to your clients next time though.
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