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Best Buy Misses Zacks Consensus Estimate

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Shares of Best Buy Company Inc. (BBY - Free Report) nosedived over 9% to $16.45 in the pre-market trading hours today as investors turned jittery following the weaker-than-expected second-quarter 2013 results.

Earnings of this consumer electronic products retailer came in at 20 cents per share, down 49% from 39 cents in the year-ago quarter, and also short of the Zacks Consensus Estimate at 31 cents.

On a reported basis, including one-time items, quarterly earnings fell substantially to 4 cents per share from 34 cents.

This slide challenges Hubert Joly, the newly appointed Chief Executive Officer, with the task of completely revamping the operations. Best Buy also suspended its future share buyback program and abstained from providing an earnings projection for fiscal 2013. On the other hand, we believe that the company’s dismal results may strengthen the position of Richard Schulze, the former Chairman and founder of Best Buy, who has been advocating for a buyout proposal.

Let’s Dig Deep

Richfield, Minnesota-based Best Buy stated that total revenue dropped 2.8% year-over-year to $10,547 million, which was also lower than the Zacks Consensus Estimate of $10,634 million. Comparable-store sales declined 3.2% but reflected an improvement of 60 basis points over the prior-year period.

Gross profit fell 7% to $2,564 million during the quarter, whereas gross margin contracted 110 basis points to 24.3%. Adjusted operating income decreased 52% to $124 million, whereas operating margin declined 120 basis points to 1.2%.

Domestic segment revenue tumbled 2.2% to $7,803 million. Comparable-store sales fell 1.6% during the quarter, reflecting sales declines in gaming, notebooks, digital imaging and televisions, partially mitigated by growth registered across tablets, mobile phones, appliances and eReaders. Mobile phones comparable-store sales increased 35%. Domestic segment online revenue jumped 14%, connections rose 11%, whereas revenue for the services category climbed about 6%. Management remains optimistic of achieving the set target of domestic market share for the fiscal year.

The domestic segment’s gross profit slipped 6% to $1,896 million during the quarter, while gross margin came in at 24.3%, down 110 basis points.

International revenue decreased 4.7% year-over-year to $2,744 million. Moreover, comparable-store sales dropped 8.2%, reflecting revenue declines in Five Star business in China. Moreover, weaker sales of notebooks, digital imaging and home theater in Canada negatively impacted the results.

The International segment’s gross profit dipped 9% to $668 million during the quarter, while gross margin shrunk 130 basis points to 24.3%.

Other Financial Details

Best Buy’s cash position has plunged 67.3% year-over-year to $680 million. Total long-term debt was $1,707 million and shareholders’ equity was $4,111 million at the end of the quarter.

During the quarter, the company bought back approximately 6.3 million shares aggregating $122 million at a price of $19.28 per share. Moreover, the company also paid a quarterly dividend of 16 cents per share, totaling $54 million, on July 3. Management projects free cash flow generation of $1.25 billion to $1.5 billion for fiscal 2013.

Currently, we have a long-term “Neutral” recommendation on the stock. Moreover, Best Buy, which faces competition from Wal-Mart Stores Inc. (WMT - Free Report) and Inc. (AMZN - Free Report) , holds a Zacks #3 Rank (short-term Hold).

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