Peter Keith, Piper Jaffray (Overweight; $34 PT)
After an extremely disappointing Q4, BBY's Q1 results are critically important to determine if gross margin pressure this past holiday was the result of an ultracompetitive pricing environment (a long-term issue) or promotional mis-execution by BBY (a short-term issue). In our view, BBY's GM pressure of -230 bps y/y in Q4 (the worst in at least 10 years) was due in part to company promos in a fading mobile phone cycle which essentially gave away profits. Improving its promo cadence could allow for GM upside. We also note that many initiatives and cost saves this year appear more GM focused vs. SG&A. Sales trends will likely remain lackluster for the foreseeable future in the absence of a meaningful product cycle. BBY will report Thursday morning and while we are modeled at Q1 EPS of $0.19 (below consensus of $0.20) we believe BBY could post GM upside on relatively low expectations.
Christopher Horvers, JPMorgan Chase (Overweight; $34 PT)
We are cautious on trends heading into earnings as reflected by our 1Q earnings estimate of $0.15 versus consensus of $0.20 (due to a negative 1.5% domestic comp and a 210-bp decline in domestic gross margin). That said, we remain positive on stock given long-term efficiency opportunities. Additionally, we believe the stock sets up well in the back half as the company laps a very difficult 4Q13 and as BBY improves its marketing, online effectiveness, and fulfillment options. Potential tailwinds for 2H include: improved ecommerce capabilities (e.g., CRM, website functionality, personalized marketing), continued cost costs (only half of the $765MM from 2013 had fully annualized to start the year), a return of momentum in BBY's mobile business now that they offer installment plan options, and ship from store gross margin benefits related to end of life inventory and returns, replacements, and damages-all against a 240-bp decline in domestic gross margin in 4Q13.
Mike Baker, Deutsche Bank (Buy; $36 PT)
BBY has been able to beat estimates in the non-holiday quarters as pricing pressure is less of a factor, meaning cost savings are easier to bring to the bottom line. We think that will occur again in 1Q, setting up for a beat and potentially positive stock reaction.
--Written by Laurie Kulikowski in New York.