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Best Buy Tops Estimate, Earnings Drop

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Best Buy Company, Inc. (BBY - Free Report) posted first-quarter fiscal 2014 earnings of 32 cents a share that surpassed the Zacks Consensus Estimate of 25 cents, but dropped substantially by 57.9% from 76 cents earned in the year-ago quarter.

The year-over-year decline in the bottom-line was due to one week less in the quarter under review compared with the prior-year period, the shifting of the Super Bowl in the fourth quarter of fiscal 2013, competitive pricing policies and no major product launches.

Including one-time items and discontinued operations, the company reported quarterly loss of 24 cents a share sharply down from earnings of 46 cents in the comparable prior-year quarter.

The company is undergoing through a turnaround program including price match policy, multi-channel strategy, multi-year cost reduction program and closing of some big box stores. Best Buy in the quarter has been succeeded in lowering its cost by $175 million, which is in addition to $150 million reduced in the fourth quarter of fiscal 2012.

Moreover, the company is leaving no stone unturned in wooing consumers and capturing incremental revenue, as evident from its strategic initiative of opening "Samsung Experience Shops" within its stores.

Best Buy, which competes with RadioShack Corp. , had also entered into a contract to divest its 50% stake in Best Buy Europe to Carphone Warehouse Group, the joint venture partner in the same. The move would help this consumer electronic retailer to concentrate more on its U.S. operations, which has been facing a stiff competition from industry bellwethers such as 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 augment its return on capital employed.

Despite these catalysts, management cautioned that second quarter gross profit and earnings would be weighed upon by competitive pricing and investments made in areas such as online, mobile, the multi-channel approach and refurbishment of its website ( functionality, which would not reap benefits before fiscal 2015.  

Coming to the results, total revenue for this Zacks Rank #3 (Hold) stock dropped 9.6% to $9,380 million, and also fell short of the Zacks Consensus Estimate of $10,791 million. Comparable-store sales edged down 1.3% compared with a decline of 5.2% in the prior-year period.

Gross profit slid 16% year over year to $2,170 million during the quarter due to weak top-line performance, whereas gross margin contracted 180 basis points to 23.1%. Adjusted operating income plunged 54.1% to $186 million, whereas operating margin plummeted 190 basis points to 2%.

Segment Details

Domestic segment revenue fell 9.6% to $7,979 million. However, excluding one week in the prior-year period, revenue decreased 2.2% due to closure of 49 big box stores and a decline of 1.1% in comparable-store sales. The drop in comps was due to shift of the Super Bowl into fourth-quarter fiscal 2012 and trimming of sales in non-core areas.

Domestic online sales jumped 7.1% to $498 million. Excluding the extra week, online sales surged 16.2% on the back of improved traffic.

Robust growth in mobile phone and appliances was witnessed during the quarter. However, this was offset by decline in gaming and home theater.

The segment’s gross profit fell 16.2% to $1,871 million during the quarter, while gross margin came in at 23.4%, down 190 basis points due to rise in promotional activities and increase in inventory shrinkage.

International segment revenue tumbled 9.6% to $1,401 million. Excluding one extra week, the revenue fell 5.1% because of closure of 15 big box stores and a decline of 2.8% in comparable-store sales. The drop in comps was due to competitive environment in Canada but partially offset by effective comps growth across China on the back of promotional strategies.

The International segment’s gross profit dipped 14.8% to $299 million during the quarter, while gross margin shrunk 130 basis points to 21.3%, reflecting lower margin product mix forming part of revenue generated from China and increased promotional activities.

Other Financial Details

Best Buy ended the quarter with cash and cash equivalents of $908 million, long-term debt of $1,142 million and shareholders’ equity of $2,916 million, excluding non-controlling interest of $632 million.

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