Best Buy (BBY) Downsizes and Focuses on Smaller Mobile Stores

After Best Buy (BBY: Charts, News) reported a massive fourth quarter loss yesterday, shares slid nearly 10% as investors abandoned the struggling electronics retailer. The company reported a loss of $4.89 per share, or $1.7 billion, a sharp drop from the profit of $1.62 per share, or $651 million, it posted in the prior year quarter.

The loss was attributed to $2.6 billion in charges related to the acquisition of Carphone Warehouse Group's interest in Best Buy Mobile, as well as an impairment charge caused by Best Buy Europe. Excluding these hefty one-time charges, Best Buy actually earned $2.47 per share, beating the analyst consensus of $2.15 per share. Total revenue climbed 3% to $16.08 billion, but came in short of the expected $17.18 billion.

Daily Chart
These numbers failed to satisfy investors, who have been increasingly convinced that e-commerce giants Amazon (AMZN: Charts, News) and eBay (EBAY: Charts, News) have irreparably breached Best Buy's core competencies. Many investors fear that the company will implode, like its former rival Circuit City, which went bankrupt in 2009 using a nearly identical business model. To exacerbate the problem, Apple's (AAPL: Charts, News) popular Apple Stores have also stolen brick-and-mortar business away from consumer electronics retailers.

Best Buy acknowledged these fears, stating that it planned to close 50 big box stores and open 100 small mobile locations across the United States. The company currently operates 1,450 stores domestically and 2,900 internationally. The company's massive warehouse stores have become a liability, as sales of TVs, digital cameras and video game consoles slid sharply in the past quarter.

Meanwhile, sales of smartphones, tablets and e-readers rose, convincing the company's management that smaller, cheaper stores specializing in a concentrated line of next generation Internet devices - Best Buy Mobile - would be more profitable. Best Buy intends to open as many as 800 Best Buy Mobile stores by fiscal 2016 - a huge increase from its current 305 stores. While cashing in on the current smartphone and tablet craze might seem like a forward thinking idea, investors should remember that retailers must split the razor thin margins with telecom providers. In addition, these devices are often sold at a loss in order to bind customers to long-term contracts. Currently, the biggest winners in the smartphone and tablet boom are the manufacturers themselves, not the retailers.

A smaller footprint would decrease revenue but increase margins, which would translate into stronger earnings per share. In the fourth quarter, Best Buy's same-store sales dropped 2.4%, an improvement over the previous year's 4.7% decline. For the next year, the company expects same-store sales to decline between 2% to 4%. Expectations for negative same-store sales is extremely discouraging for a retailer, especially for one that is in the midst of a massive restructuring campaign.

Best Buy intends to cut $250 million in costs in fiscal 2013, in order to increase its earnings to $2.85 to $3.25 per share, or adjusted earnings of $3.50 to $3.80 per share. By 2015, the company expects to reduce costs by $800 million - a lofty target that can only be achieved through significant downsizing and restructuring.

Analysts expect 2013 earnings of $3.67 on an adjusted basis. Best Buy also expects 2013 revenue between $50 billion to $51 billion, slightly missing Wall Street expectations of $51.6 billion.

For fiscal 2012, the company posted a loss of $3.36 per share, or $1.23 billion, a sobering drop from its profit of $3.08 per share, or $1.28 billion, a year earlier. After adjustments for one-time charges, Best Buy's full-year earnings were $3.64, topping last year's adjusted $3.43 per share. Its 2012 revenue of $50.71 billion was a 2% increase over the previous year. Shares currently trade at 6.6 times forward earnings with a 5-year PEG ratio of 0.92.

Other News About BBY
Best Buy feels Amazon squeeze, to close 50 big-box stores
Amazon takes a bite out of Best Buy.
Best Buy is closing 50 stores after losing money
Will cost-cutting initiatives save Best Buy from being the next Circuit City? Other Stocks in the News
Apple's Tim Cook Visits Foxconn IPhone Plant in China
Tim Cook visits Apple's often vilified production partner.
Baidu in Your Back Pocket
Is Baidu a sound investment at current levels?

Copyright 2012 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Mar 30, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

Posted in ...