How Much Will Best Buy’s Turnaround Efforts Lift Earnings?

Electronics retailing giant Best Buy (NYSE:BBY) will announce its Q1 results on May 20. We expect the company to report better year-over-year revenues largely due to its price matching policy. However, margins could come in lower due to aggressive pricing, which will weigh on earnings.

Best Buy was in news this quarter for three main reasons: the start of its price matching policy, its new Samsung-branded store within a store concept and the decision to exit Europe by selling its stake in its joint venture with Carphone Warehouse.

CEO Hubert Joly seems to have taken some steps to arrest the slide in Best Buy’s stock, and these efforts are yielding results as evident from the stock performance over the last three months. The earnings results will clarify whether the price movement is sentiment-driven or backed by improved business prospects.

See our full analysis for Best Buy

Exiting Europe

Last month, Best Buy announced its decision to sell its 50% stake in Best Buy Europe, the joint venture with Carphone Warehouse Group (CPW), Europe’s biggest independent mobile phone retailer. Best Buy Europe consists of CPW’s former retail and distribution business with nearly 2,400 small-format The Carphone Warehouse and The Phone House stores, online channels, device insurance operations, and mobile and fixed-line telecommunication services. ((Best Buy to Sell its Stake in European Business to Carphone Warehouse, Best Buy News Release))

The stake will be sold back to Carphone Warehouse for approximately $775 million or 500 million pounds. While 420 million pounds will be paid in cash, the rest will be in the form of Carphone Warehouse stock, subject to a 12-month lock-up restriction. The deal is subject to approval by the shareholders of Carphone Warehouse. It is expected to close by the end of June.

The deal will end Best Buy’s presence in Europe. It signals that Best Buy is more keen to focus on the domestic U.S. market where it is facing formidable challenges from players like Wal-Mart and Amazon. The company needs a strong balance sheet to meet its expansion targets in the U.S. and this deal seems to be a step in that direction.

Best Buy will report the results of the Best Buy Europe joint venture in discontinued operations. In the first quarter, it will take an estimated non-cash asset impairment charge of approximately $200 million, associated with accumulated foreign currency translation losses that will be written off at the time of closing. Best Buy will also pay Carphone Warehouse $45 million to end another venture to partner with mobile phone stores in other countries.

Prior to entering into this agreement, U.S. GAAP revenues for Best Buy Europe in the ongoing fiscal year were expected to be in the range of $5.5 to $5.6 billion. Hence, by virtue of a 50% stake, the impact on Best Buy’s revenues this year will be around $2.8 billion.

We think that the cash from the Carphone Warehouse transaction will be used to further expand Best Buy mobile and make investments in altering the product mix at its outlets. The company has identified certain items such as washing machines which customers prefer to buy from stores rather than online.

Price Matching Commences

Best Buy put in place a permanent “Low Price Guarantee” policy on March 3. Under this policy, the company will price match all local retail competitors and 19 major online competitors in all product categories and on nearly all in-stock products, whenever asked by a customer. This guarantee is available on Best Buy’s website at more than 1,000 Best Buy big box stores, more than 400 Best Buy Mobile standalone stores in the United States, as well as on the telephone. The policy is an attempt by the company to tackle the problem of showrooming, i.e. the phenomenon of potential customers using brick-and-mortar stores to browse through products only to order them online at cheaper prices. ((Best Buy Makes Price Match Permanent to Win Back Clients, Bloomberg))

The earnings results would reveal whether the policy has been successful in achieving the desired outcome.

Samsung Sets Itself Up Within Best Buy Stores

Best Buy and Samsung have entered into a partnership to set up “Samsung Experience” shops staffed with Samsung employees within 1,400 Best Buy stores by June. A number of these in-house stores have already opened and according to Joly, the feedback has been positive so far. While this has given Best Buy access to a successful vendor and will drive customer footfalls to stores, Samsung has gained access to Best Buy’s vast store network to sell its smartphones and tablets by eating into Apple’s market share. Apple already has in-house shops at Best Buy stores. ^[1]

The in-house stores were set up only towards the end of April so the actual impact will be witnessed only in the subsequent quarters. Best Buy follows a February-January calendar year.

In addition to comments on the price matching policy, the partnership with Samsung, and plans for the cash from selling the European business, we will look out for Best Buy’s comments on the Marketplace Fairness Act making it through the Senate. The bill is designed to bring online retailers under the sales tax purview to give physical retailers a level playing field and will now be discussed by the House of Representatives. ^[2]

We have a price estimate for of $20 Best Buy.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Best Buy CEO ‘Pleased’ With Samsung Shops’ Early Results, CNBC [↩]
2. The Internet Sales Tax Is Too Late to Help Best Buy’s Stock, The Motley Fool [↩]