Best Buy Has A Number Of Profit Levers To Pull

By Ryan C. Fuhrmann | June 15, 2011 AAA

Electronics retail giant Best Buy (NYSE:BBY) reported first-quarter results on Tuesday that saw sales come in ahead of analyst projections. Profits fell compared to last year's first quarter, but also beat analyst expectations. Domestic sales continue to struggle, but the company is proving it has a number of ways to keep sales and earnings moving steadily forward.
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First Quarter Recap
Total sales rose a very modest 1% to just below $11 billion as double digit growth in online sales, mobile phone sales and a healthy 7.6% advance in international sales (28.2% of total sales) were offset by a continued decline in flat-panel televisions and "physical media", including recorded music and movies. The latter category continues to see consumers migrate to online offerings from the likes of Apple's (Nasdaq:AAPL) iTunes and Netflix's (Nasdaq:NFLX) online movie subscription model. Sales of Apple's iPad and eReaders, including Amazon's (Nasdaq:AMZN) Kindle and even Barnes and Noble's (NYSE:BKS) Nook, also proved popular during the quarter.

A more promotional sales environment caused domestic gross profit margins to fall to 25.1% of sales as gross profits declined 3% to $2 billion. Total company gross profits fell a less severe 1% on strong international profit growth. Canada was singled out for higher selling prices. SG&A costs were flat compared to last year's first quarter, and resulted in a total operating income decline of 10% to $282 million. This represented a razor-thin operating margin of 2.6% of sales. Higher interest expense contributed in sending the bottom line down further as net income fell 12.2% to $136 million. Share buybacks helped per-share results as earnings fell only 2.8% to 35 cents per diluted share.

Outlook
For the full year, the company said to expect sales between $51 billion and $52.5 billion for year-over-year growth in the low-single digits. Earnings guidance is in a range of $3.28 and $3.53 per diluted share for year-over-year growth between 6.5% and 14.6%.

The Bottom Line
Despite the near-term pressure to Best Buy's domestic trends, it appears to have a number of levers to pull to keep overall profitability moving forward. Its international sales and profits both continue to improve, and its size is allowing it to drive a hard bargain with suppliers. For the quarter, it boosted operating cash flow markedly through lower inventories and taking longer to pay off accounts payable.

At a forward P/E of about 9, the stock continues to have a favorable risk/reward tradeoff. As a giant electronics retailer with a wide array of products, it should always be able to offer popular merchandise to boost sales and earnings. The long-term risk is that consumers increasingly buy these products online, but there should always be a need to see the most popular electronic gadget in person before purchase, and talk with a knowledgeable sales employee to see exactly how it works. (For related reading, also take a look at Analyzing Retail Stocks.)

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