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.
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.
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