Best Buy Co. Inc. (BBY, Financial) recently revealed its first quarter results for fiscal 2015. The company logged non-GAAP earnings from continuing operations of $0.37 a share, comfortable beating the consensus estimate of $0.29 a share as well as the year-ago EPS of $0.35 a share. Following the results, Best Buy shares climbed over 4% to the day’s high of $36.60 and retained a positive momentum even in the after-hours trading.
International Business Drags Revenues
Best Buy reported a marginal decline of 0.9% year-over-year in revenues to $8.56 billion for the first quarter of fiscal 2015. However, the figures managed to surpass the consensus estimate of $8.52 billion on the back of 0.6% growth in comparable-store sales compared to a 1.8% decline in the year-ago quarter. Further, the electronics retailing giant posted 3.2% year-over-year growth in gross profit for Q1 2015 to $2.03 billion, while gross margin increased by 90 basis points to 23.7% of net sales. However, the company’s non-GAAP operating profit came in at $219 million, down 0.9% year-over-year, while growth in operating margin remained flat compared to the year-ago quarter.
Segment wise, Best Buy saw 1.4% year-over-year growth in Domestic sales to $7.89 billion, despite a 0.7% drop in comparable-store sales. The company attributed the growth to strong performance of its credit card portfolio as well as its instalment-billing program. Comparable-online sales for the quarter grew 5.3% year-over-year of $673 million on the back of higher traffic as well as conversion rates. The company saw maximum growth in mobile phones and TVs, which more than offset a drop in sales at the computing and tablets segment. The Domestic segment saw non-GAAP gross profit of $1.81 billion, up 2.6% compared to the year-ago quarter, while adjusted margin stood at 22.9% of net sales, up 20 basis points year-over-year.
At its International segment, Beat Buy saw massive 22.1% year-over-year decline in revenues to $668 million, owing to slowdown in the Canadian market as well as the company’s brand consolidation program. Negative foreign currency headwinds also contributed to the poor performance. The segment reported 25.5% year-over-year drop in non-GAAP gross profit to $152 million, while gross margin contracted 100 basis points to 22.8% of net sales. Concurrently, Best Buy saw its adjusted operating loss increasing from $15 million in the year-ago quarter to $27 million in Q1 2015.
Outlook for Q2 2015
Following the results, Best Buy, which competes with other consumer electronics retailers, such as HHGregg Inc. (HGG, Financial), Aaron’s Inc. (AAN, Financial) and Conns Inc. (CONN, Financial), provided guidance for the second quarter of fiscal 2015. Overall, Best Buy foresees a flat to low single digit growth in revenues for Q2 2015, with adjusted margins contracting 30 to 50 basis points owing to escalated expenses towards ongoing investments. With the conclusion of its brand consolidation program in Canada in the first quarter, the company expects the impact of the program to be felt through the fiscal, which, along with foreign currency headwinds and store closures is expected to pull down international revenues by 30% to 35% in Q2 2015. Adjusted operating margins are also projected to be in the -5% to -3.5% range. However, domestic sales are projected to remain strong with revenues expected to remain flat or increase in low single digits during the second quarter. Consensus estimates peg the company’s Q2 earnings at $0.33 a share.
Final Thoughts
While Best Buy reported better-than-expected earnings and revenues for the first quarter of fiscal 2015, the company also saw significant growth in comparable-store sales compared to the prior-year quarter. At the same time, the retailer also saw positive growth in both gross profit and gross margins for the quarter. However, the massive dip in revenues and profits at Best Buy’s International segments is a cause for concern, with the company expecting the impact of its brand consolidation and store closures to be felt in the second quarter as well. Although experts also foresee these steps negatively affecting results for FY2015, Best Buy is expected to see average annual earnings growth rate of nearly 12% over the next five years with a peak likely at the end of fiscal 2017. Consequently, the Best Buy stock currently carries a ‘hold’ guidance.
