This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

What Wall Street Missed in Best Buy's Earnings

Stocks in this article: BBY WMT TGT SHLD AAPL

Updated from 8:34 a.m. EDT

NEW YORK ( TheStreet) -- Best Buy (BBY) wasn't expected to light it up financially in the second quarter as sluggish demand for mobile phones and tablets weighed on results. Even considering Wall Street's low expectations, Best Buy's results were still a disappointment.

Watch the video below for a closer look at Best Buy's latest quarterly results:


WATCH: More market update videos on TheStreet TV

Best Buy shares fell 5.1% to $30.35 in midday trading on Tuesday. But Wall Street may be underestimating the company's financial potential during the all-important holiday season as it implements initiatives designed to improve customer service.

The electronics retailer reported adjusted earnings of 44 cents a share vs. the Bloomberg consensus of 31 cents, marking the seventh straight quarter that Best Buy eclipsed Wall Street forecasts. However, despite domestic online sales growth of 22%, which followed a 29.2% increase in the first quarter, net sales of $8.9 billion fell short of the consensus of $8.98 billion. The culprit for the shortfall was a 2.7% decline in same-store sales, which came in 50 basis points below Wall Street's estimates.

Domestic and international same-store sales declined 2% and 6.7%, respectively, with President and CEO Hubert Joly noting "traffic to our brick and mortar stores continued to decline."


 
Watch More: How DineEquity's CEO is Transforming IHOP and Applebee's

Best Buy found another $40 million in cost savings related to its "Renew Blue" restructuring plan, on top of $95 million in savings in the first quarter, and reiterated its target for savings of $1 billion of which $900 million has been realized thus far. On the earnings call, Chief Financial Officer Sharon McCollam acknowledged the slowing pace of expense savings but highlighted the opportunity to save north of $300 million looking out to 2016 through better management of merchandise returns. That could bring Best Buy's total restructuring target under "Renew Blue" to more $1.3 billion when it's completed.  
  
Here are three things that initially spooked Wall Street:

Domestic segment: With a 2% domestic same-store sales decline in the second quarter, the rate of decrease quickened on a sequential basis even as Best Buy called out higher "in-store conversion" in the quarter and has closed the pricing gap with rivals Amazon (AMZN) and Walmart (WMT) via a new price-matching program. Same-store sales in the domestic segment declined 1.3% in the first-quarter of this year, after a 1.2% fall during the holiday season of 2013.

Further, gross profit margins for the segment contracted 390 basis points year over year, or 50 basis points adjusted for one-time items, due to a sales mix shift to lower margin departments such as gaming and computing, as well as continued price investments. In the first quarter, gross profit margins declined 70 basis points year over year.

The company's cost savings in the quarter from "Renew Blue" didn't fully offset factors that include, among other things, the company's actions to make its prices more competitive, leaving many on Wall Street wondering if the second half of the year will be challenging for profits as cost savings benefits ease.

Read More: Walmart's Massive Earnings Warning Underscores 2 Big Concerns

International segment:
The business continues to be an operational eyesore for Best Buy; declining same-store sales and gross profit margin erosion have become the norms. That did not abate in the second quarter -- same-store sales fell 6.7% and gross profit margins dropped 120 basis points year over year, reflecting heightened promotional environments in China, Mexico, and Canada. Best Buy hasn't disclosed its long-term intentions for its international businesses with investors, only stating on the earnings call that it intends to implement a "Renew Blue" type restructuring plan in its non-domestic businesses. So the predominant view is that the company will enter 2015 as a global retailer with an international segment dragging on total performance.

Commentary: Management's forward-looking commentary left much to be desired, somewhat undercutting Wall Street's bullishness for the company's holiday season as new Apple (AAPL) products arrive and demand strengthens for high margin large screen TVs. McCollam remarked, "Industry-wide sales are continuing to decline in many of the consumer electronics categories in which we compete.  We are also seeing ongoing softness in the mobile phone category ahead of highly-anticipated new product launches."

Watch More: Buffalo Wild Wings CEO Tackle's the Future with Innovation
 
What Wall Street may have overlooked was the impact from a $40 million to $50 million investment in the second half of the year in speeding up shipping times and order fulfillment for merchandise. The company has put its money where its mouth is -- after increasing 2% year over year in the second quarter, Best Buy's inventory in the second half of the year, according to McCollam, will "continue to increase at this level to support ultra-high definition televisions and Pacific kitchen shop in shop expansions, and our decision to reduce retail out of stocks."

Another glanced-over item was that come holiday season 2014, Best Buy will have ship-from-store capabilities for its merchandise in all 1,400 of its stores, reducing the likelihood of missed sales and helping to support stronger profit margins on clearance goods. In last year's holiday season, Best Buy only had this option available in a few hundred stores.  The new capability has already provided a jolt to the business. Joly said ""similar to the first quarter, ship-from-store represented more than of online sales growth" in the second quarter.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,859.42 +54.62 0.31%
S&P 500 2,073.22 +2.57 0.12%
NASDAQ 4,776.0770 +10.6970 0.22%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs