Best Buy's Disappointing Fourth Quarter Results Beginning of Inevitable Decline?
Total revenue in Best Buy’s fourth quarter declined 2.4% compared to the previous year, including a 2.2% drop in domestic revenue and 2.9% drop internationally. Its net loss swung to $4.89 per share, compared to net income of $1.62 per share the previous year. The company was afflicted by a 21% decline in entertainment revenue and various charges, including restructuring charges related to store closures in the UK.
The fourth quarter results are the first time the big-box retailer’s collision with the reality that people increasingly shop online has been clearly seen. U.S. consumers spent $144 billion on electronics in 2011, one-half percent less than in 2010. Online, direct mail and TV shopping sales increased 7 percent to 24 percent of sales, an increase from 22 percent in 2010. Meanwhile, in-store sales fell 2.5 percent, according to NPD Group. Best Buy, however, was still the No. 1 retailer, followed by Walmart (WMT) and Apple (AAPL).
“Despite their sales strength, retail stores still face serious challenges in 2012 as volumes in the traditional CE categories, which once carried these stores, continue to slide. It shouldn’t be forgotten, however, that a large majority of mobile phones and tablets/e-readers (the two fastest growing CE categories) have mostly been driven through in-store experiences,” said Stephen Baker, vice president of industry analysis at NPD.
In response, Best Buy management is focusing on cost savings. It plans to cut 50 U.S. big box stores and reduce spending by $800 million — including employee layoffs
Instead, it will open 100 smaller stores and focus on online revenue growth. Another idea it has proffered it its “Connected Stores.” A Connected Store is something like a Best Buy version of an Apple store. It has cool interior, interactive displays, and trained staff to help customers with demo mobile phones, tablets, computers and wireless networking. Two Connected Stores will be tested in Twin Cities and San Antonio markets in fiscal 2013.
Some value investors think this pivotal time for Best Buy makes it attractive. Nine own the stock as of the end of the first quarter. David Einhorn in particular seems positive on the company. He owns 7,714,375 shares — 2.2 percent of his portfolio — after buying shares each quarter of 2011.
On a fundamental basis, the stock is at low valuations. Its P/E ratio is 8.4, P/B ratio is 1.6 and P/S ratio is 0.2. It also appears on GuruFocus’ Historical Low P/S Ratio screener as trading 11.9% above its historical low of 0.17.
The company achieved record revenue of $50.3 billion in 2011, increased from $49.7 billion in 2010 and has $5.6 billion in cash on its balance sheet, with long-term liabilities and debt of $2.8 billion. Margins have held relatively stable over the last 10 years. Return on equity declined from 18.9% in 2010 to 17.5% in 2011, and return on assets declined from 9.4% to 8% in the same span of time.
It is also shareholder friendly. In fiscal 2011 it repurchased 54.6 million shares totaling $1.5 billion and paid a dividend of $0.16 per share, which it has increased annually since 2004, or $56 million in the aggregate.
David Einhorn bought Best Buy based on its solid financials, and anticipated Best Buy shrinking its stores as its retail model becomes less effective. He wrote in his first-quarter 2011 shareholder letter: “Bears believe that the Internet puts BBY on a path to Blockbuster-video obsolescence. We think that view overstates the risk as there is value in store help, merchandising, service and being able to walk out of the store with your purchase. While BBY’s big box stores in the U.S. are mature (and, in fact, BBY will reduce its footage by a couple percent per year), we believe that BBY has more than offsetting growth opportunities in its Best Buy Mobile concept, international retail, and through additional higher-margin services offerings. In addition, the company currently has minimal leverage and between earnings and working capital improvements should generate almost a 20% free cash flow yield this year. BBY has targeted $1.3 billion of share repurchases this fiscal year, which is approximately 10% of its current market capitalization. The Partnerships established their position at an average price of $33.33 per share, representing a multiple of approximately 10x expected calendar 2011 earnings and less than 8x our estimate of 2012 earnings. BBY stock ended the quarter at $28.72 per share. Based upon the price drop since our acquisition, this has not yet proven to be a good buy.”
Einhorn will have to wait even longer for it to become a good buy as the company predicts a same store sales decline of 2 to 4 percent for fiscal 2013.
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