Best Buy (BBY, Financial) shares surged nearly 10% on May 21 after the retailer released its first-quarter results with both profit and revenue beating Wall Street estimates. The company’s top line was bolstered by strong consumer electronics sales, particularly of large-screen televisions, handsets and appliances. Not only did the retailer outperform analyst expectations, but it’s also given an impressive outlook for the next quarter.
That being said, it is important to note that Best Buy’s foreign sales came in weak. The company saw strong numbers as far as the domestic operation is concerned, but the international market brought discontent. The stronger domestic currency and the restructuring going on in the Canadian market were the prime culprits for such disappointment. Let’s take a closer look at the quarter’s takeaways and try to ascertain the company’s future prospects.
A look at the latest numbers
Best Buy’s quarterly revenue was $8.56 billion, which is a plunge of about 5.3% compared with last year. The drop is primarily attributable to the strengthening of the dollar and the restructuring going on in Canada. As such, sales from the domestic market showed a year-on-year rise of about $109 million to $7.89 billion, but the international revenue fell nearly 22% to $668 million. The Street reacted pretty well on the improvement in domestic revenue since typically the first quarters are dry.
The Richfield, Minnesota company’s earnings per share (EPS) grew 11.5% to $0.37. Analysts had forecast the company’s earnings per share to come in around $0.29 on a revenue of $8.46 billion. Best Buy satisfied them on both fronts. Best Buy topped analysts on the same-store sales as well. The key retail metric improved 0.6%, surpassing estimations of a 0.1% increase. The company’s online sales rose 5.3% to $673 million.
In the first quarter of 2014, Best Buy had turned in revenue of $9.04 billion. This was inclusive of revenue from its China division Five Star, which got sold thereafter. Excluding the division, the company’s revenue stood at $8.64 billion.
What worked for the retailer?
In the earnings press release Hubert Joly, the president and CEO of Best Buy, said: “We continued to take advantage of strong product cycles in large-screen televisions and iconic mobile phones and continued growth in the major appliance category.” Smartphone sales were quite strong during the first quarter, and this is what boosted growth.
Initially the management did not indicate the specific smartphones that aided the consumer electronics segment’s growth the maximum. But later during the release, Joly acknowledged the two key handsets that were most popular among the customers. They were the Apple (AAPL, Financial) iPhone and the Samsung (SSNLF, Financial) Galaxy S6.
Joly said that the company’s strategy of providing "advice, service and convenience at competitive prices" continued to reverberate with its customers all through the first quarter. There’s no doubt that seamless merchandising, marketing and strong operational performance were the key drivers of Best Buy’s higher-than-expected quarter results. However, tactically speaking, the company considers that its ability to unfailingly beat the market has been supported by its improving multi-channel customer experience.
Impact of Canada operations
During the quarter, the Future Shop and Best Buy brands got merged under the Best Buy brand in Canada, the company’s second-largest market. The move is expected to bear a significant impact on all stores operating in Canada.
The company disclosed that it expects its international division revenue to see a further fall in the range of around 30% to 35%. The closure of some stores in Canada clubbed with a negative impact of strong U.S. dollars shall remain the prime reason behind the softness in the international market. The company is currently involved in consolidating operations in the country. Closure are expected to result in job cuts of around 500 fulltime employees and about 1,000 part time workers there.
Best Buy has already closed 66 stores in March and has transformed 65 into Best Buy. This company’s unflinching move is an attempt to undertake a radical reorganization in the difficult retail environment. Restructuring in Canada would cost about $191 million to the company and hit the annual earnings of the company. However, the move shall bear fruits down the line.
Best Buy’s strengths can be sensed in numerous areas, which clearly outweigh the international weaknesses it’s currently exposed to. It’s attractive valuation, compelling growth potential, and decent cash generation should keep investors interested.
