Big-box electronics retailer Best Buy (BBY), on Thursday, issued fiscal fourth-quarter 2012 results that beat expectations on the bottom line but fell short of consensus forecasts on the top line. The beleaguered retailer also outlined a new transformational strategy that we view to be fraught with implementation and execution risk. We expect to take a closer look at our valuation model on Best Buy, but our fair value estimate range for the firm is unchanged at this time.
Best Buy’s revenue advanced 3% in its fiscal fourth quarter, despite comparable store sales falling 2.4% in the period (compared to a decline of 4.7% for the prior-year quarter). Gross profit advanced at a similar pace, though overhead increases did put some pressure on the company’s operating margin. On an adjusted non-GAAP basis, Best Buy’s profit of $2.47 per share in its fourth quarter was 25% better than the performance in the same quarter a year ago. Consensus estimates were at $2.15 per share for the period.
Looking ahead, Best Buy outlined plans to better compete with online retailers—namely Amazon (AMZN)—that continue to assault the pricing dynamics in the retail electronics industry and Apple (AAPL)–which distributes its products through company-owned channels. The company plans to shed $800 million in costs by fiscal 2015, including approximately $250 million in fiscal 2013. We think these numbers are achievable, as cutting costs is something management can easily get their arms around. Specifically, we expect Best Buy to close 50 US Best Buy big box stores in fiscal 2013 and reduce roughly 400 positions in its corporate and support areas.
Perhaps long overdue, Best Buy also made the decision to reduce overall square footage and to increase points of presence. We had expected a shift to this new strategy, as Best Buy’s large big-box presence is an unnecessary fixed cost in a world that has already shifted to mobile and online. Specifically, the electronics retailer plans to remodel key stores with a new Connected Store format in fiscal 2013 and to continue to expand its Best Buy Mobile small format stores through the US, adding 100 new ones during the year. Management thinks it can reach as many as 800 Mobile small format stores by 2016 (more than double today’s levels). The “re-modeling” strategy we view as fraught with execution risk and less relevant to deal with competitive pressures, and we doubt management’s Connected Store format will resonate with customers any more than the current big-box stores do. However, we’re more optimistic on the firm’s Mobile small store format, as this hits at the heart of Best Buy’s fixed cost problem.
Best Buy also announced a number of growth initiatives with respect to e-commerce, services and China. Management expects domestic segment online sales to grow 15% in fiscal 2013 and reach $4 billion by 2016, estimates we think are achievable. The firm also expects revenue from its Domestic services segment to advance 10% in fiscal 2013, a growth pace that is relatively more taxing to accomplish, in our opinion. Best Buy also laid out plans to open 50 new Five Star stores in China during fiscal 2013 and reach as many as 500 stores by fiscal 2016 (more than double today’s levels).
Looking at fiscal 2013 performance specifically, Best Buy expects revenue to be in the range of $50 billion to $51 billion (slightly lower than consensus forecasts), which reflects a comparable store sales decline in the range of 2% to 4%. Management expects adjusted non-GAAP operating income to fall between 4% and 11% during the year. On an adjusted non-GAAP basis, diluted earnings per share are expected to come in the range of $3.50 and $3.80 per share (consensus expectations were at $3.67 per share), roughly 3% to 12% higher from last fiscal year’s levels based on the range.
All things considered, we’re skeptical Best Buy will achieve its fiscal 2013 earnings range, and we note a turnaround of this magnitude will take some time. We remain on the sidelines with respect to Best Buy’s shares, and at this time, we cannot rule out that Best Buy won’t eventually go the way of Circuit City, which liquidated in 2009.