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Best Buy Q3 Earnings Beat Estimates

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Best Buy Company, Inc. (BBY - Free Report) posted third-quarter fiscal 2014 earnings of 18 cents per share that surpassed the Zacks Consensus Estimate of 11 cents and was higher than 4 cents earned in the year-ago quarter. The strong performance came on the back of effective cost containment, partly offset by soft top-line performance.

Including one-time items and discontinued operations, this Zacks Rank #1 (Strong Buy) stock reported quarterly earnings of 16 cents per share, sharply up from the loss of 3 cents in the comparable prior-year quarter.

Best Buy is undergoing a turnaround program that includes price match policy, multi-channel strategy, multi-year cost reduction program and closing of some big box stores. In the quarter, the company succeeded in lowering its annualized costs by $115 million, thereby bringing the total reduction to $505 million out of $725 million targeted from the North American business.

Management is undertaking a competitive pricing strategy and making investments in areas such as online, mobile, the multi-channel approach, optimum utilization of floor area and refurbishment of its website ( functionality. Best Buy increased “buy online - ship from store” endeavors in more than 400 outlets.

Moreover, the company is leaving no stone unturned in wooing consumers and capturing incremental revenues, as evident from its strategic initiative of opening "Samsung Experience Shops" within its stores. Taking the initiatives further, Best Buy entered into partnership with Microsoft Corp. (MSFT - Free Report) to roll out “Windows Store” across its 500 outlets in the U.S. with an additional 100 in Canada.

Best Buy remains hopeful of a good fourth quarter, especially in the holiday season due to its festive merchandise as well as marketing and shopping enhancement endeavors. Moreover, the company expects to benefit from the highly anticipated launches of the two gaming consoles PS4 and XBOX One in November.

Additionally, Best Buy has announced that its stores will open early at 6:00 pm on Thanksgiving Day and will not be shut until late evening on Black Friday. Also, the company noted that by being open on Black Friday, it will incur increases in promotional expenditure and store payroll, which will dent its fourth quarter gross margin.

Best Buy also completed the divestment of its 50% stake in Best Buy Europe to Carphone Warehouse Group, the joint venture partner in the same, and received $526 million, net cash plus $123 million in cash from the sales of shares obtained on account of divestment.

The move will help this consumer electronic retailer to concentrate more on its U.S. operations, which have been facing stiff competition from industry bellwethers like Wal-Mart Stores Inc. (WMT - Free Report) and Inc. (AMZN - Free Report) . We believe that the step to offload stake in Best Buy Europe would increase its return on capital deployed.

Coming to the results, total revenue fell 0.2% to $9,362 million, and lagged the Zacks Consensus Estimate of $9,373 million. Comparable-store sales inched up 0.3% compared with a decline of 5.1% in the prior-year period.

Gross profit slid 2.6% year over year to $2,170 million during the quarter due to weak top-line performance and increased cost of goods sold. Gross margin contracted 60 basis points (bps) to 23.2%. However, adjusted operating income increased substantially to $131 million from $36 million reported in the prior year period, while operating margin expanded 100 bps to 1.4%.

Segment Details

Domestic segment revenues rose 2.3% to $7,847 million due to 1.7% increase in comparable store sales. The comps managed to grow despite the disruptions fueled by space optimization, opening of the Windows Stores and the shedding of non-core businesses

Domestic online sales came in at $499 million, while comparable online sales rose 15.1% driven by improved traffic, increased average order value, higher quantum of online orders placed in the retail stores, along with better inventory availability through the company’s ship-from-store and online distribution center expansion endeavors.

Robust growth in mobile phone, notebooks and appliances was witnessed during the quarter. However, this was offset by decline in gaming, movies and digital imaging.

The segment’s adjusted gross profit fell 0.3% to $1,849 million during the quarter, while gross margin came in at 23.6%, down 60 bps due to higher costs related to product warranty, unfavorable mix of mobile phone service plans and increased investments.

International segment revenues fell 11.3% to $1,515 million due to closure of 15 big box stores in Canada and 20 similar stores in China in the prior year, a decline of 6.4% in comparable-store sales and unfavorable foreign currency fluctuations. The drop in comps was due to sluggish demand for consumer electronics and mobile phone inventory limitations in Canada.

The International segment’s gross profit fell 13.9% to $321 million in the quarter, while gross margin shrunk 60 bps to 21.2%, reflecting lower margin product mix as part of revenues generated from China and increased promotional activities.

Other Financial Details

Best Buy ended the quarter with cash and cash equivalents of $2,170 million, long-term debt of $1,624 million and shareholders’ equity of $3,744 million.

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