Updated to correct a sales category in the 10th paragraph.
Shares of Best Buy (BBY) are again going haywire after the company's earnings report, as a combination of low Wall Street expectations and clever tactics by the company's executives drummed up another decent quarter and outlook.
The electronics retailer's stock exploded as much as 9% in premarket trading on Thursday as third-quarter earnings came in at 62 cents a share, thumping analyst projections for 47 cents. Net sales rose 1.4% from the prior year to $8.9 billion, beating estimates for $8.85 billion.
Best Buy executives, per the new normal for the company, used a heavy dose of stock repurchases and tight expense control to confound its many critics. The company repurchased 5.4 million shares for a total of $201 million during the quarter, which helped to boost earnings by 5 cents a share. So far this year, Best Buy has bought back 15.7 million shares for a total of $517 million. Meanwhile, Best Buy managed to hold expenses relatively unchanged vs. last year even as sales increased at stores and online, which had the effect of improving operating profit.
To say Wall Street was caught flat-footed on Best Buy -- once again -- may be an understatement.
"We believe that the setup for Best Buy is more difficult this quarter, as expectations are higher," said Credit Suisse analyst Seth Sigman ahead of the results. "Our data, combined with Best Buy's continued market share gains suggests there may be modest upside to the company's third-quarter same-store sales, but the market has assumed that, and we still see some questions about lapping a strong fourth quarter last year."
There was also some significant question marks surrounding Best Buy's holiday season potential, which solid guidance went a long way to dispelling. Best Buy sees fourth-quarter earnings in a range of $1.62 to $1.67 a share. Analysts expected $1.58 a share. Overall same-store sales are projected to fall 1% or rise as much as 1%. Analysts were modeling for a 0.9% same-store sales increase.
One chief concern voiced by analysts is how effectively Best Buy will compete during the holidays with discounters such as Walmart (WMT) and Target (TGT) in the electronics and home theater categories. Each big box retailer has made efforts of late to increase the number of popular high-definition televisions and related accessories they sell, while also stepping up their discounting. They have also moved to improve their overall assortments in electronics and bolster customer service, most notably at Target.
"Given strong price compression and new competition from the discount channel, we think risk is higher for a sales and or margin miss [for Best Buy] in this category [home theater] over the next year," said Jefferies analyst Dan Binder, who estimates home theater sales make up about 20% of Best Buy's consumer electronics business. "The discounters are particularly aggressive during the holidays, so that would probably be where much of the risk lies near-term."
Best Buy will likely be weighed down during the holidays by sluggish video game sales, and may see a hit to its appliance business from an aggressive entry into the category by mall-based J.C. Penney (JCP) , Sigman said.
But Best Buy wasn't able to completely obliterate concerns on the underlying health of its business in the age of Amazon (AMZN) . Third-quarter same-store sales plunged 9.4% in the entertainment category. In the company's services business, mostly comprised of Geek Squad, sales remained challenged and fell by 1.8%. Once red-hot appliance sales growth for Best Buy slowed for another straight quarter -- same-store sales rose 3% compared to a 16.4% increase a year ago.