What Do Best Buy’s Better Than Expected Holiday Sales Mean For Its Outlook?

Best Buy (NYSE:BBY) released its holiday sales results at the end of last week, sending its stock price soaring by nearly 16%. ^[1] The revenues for the nine week holiday period were comparable to those of last year, down marginally by 0.4% from $12.9 billion to $12.8 billion. Also, same-store sales dropped by 1.4% compared to the previous holiday season. The sudden jump in the company’s share price could be due to the market’s expectations of weaker results than reported. ^[2]

There are two pertinent questions to be answered:

1) How did Best Buy manage to beat market expectations?

2) What, if anything, do these results mean for the struggling retailer?

The short answer to the first question could be the price matching strategy adopted by Best Buy this holiday season. However, in our opinion, one should analyze the sales numbers in detail.

The impact of these results would most probably not be visible immediately. Nonetheless, we expect that it would aid Richard Schulze’s efforts to come up with a buyout proposal for Best Buy, in collaboration with private equity players. Schulze has been granted time until the end of February to come up with a proposal.

See our full analysis for Best Buy

Better Results Than Expected

While the growing phenomenon of showrooming was expected to lead to weak performance, results came in better than expected. The most likely reason seems to be the price matching strategy adopted by Best Buy for the holiday season.

The company matched the lower prices offered by Amazon and other online retailers in its brick-and-mortar stores. It also offered free shipping for items which customers found out-of-stock in its stores. Earlier, e-commerce players were largely exempt from paying sales-tax in most states. This loophole has been plugged by many states and fewer states now permit themselves to be used as sales-tax havens. The increased costs have been passed on to the customers, reducing the price differential between online and physical retail stores. Thus, Best Buy may have found it easier to match these prices. It may have thought that customers who value the whole experience of shopping and interacting with knowledgeable sales staff may now opt to buy from a Best Buy store if they are getting products at the same price. (See Best Buy Stores Match Amazon’s Prices To Tackle Showrooming, Trefis)

This brings into focus other reasons like better employee training being responsible for a solid performance according to Best Buy. However, we think that it’s difficult to verify or quantify the impact of this on revenues, unless an independent study seeking to answer the question is conducted. ^[3]

Scratching The Surface

We think that the surge in optimism needs to be tempered because the numbers also reveal some discouraging underlying trends which have been persistent for a long time. While same-store sales rose for categories like mobile phones, tablets, and appliances, they fell in segments like entertainment, computers, and TVs. This is in line with the structural shift being witnessed in the electronics retail industry for quite some time now. The average selling price for TVs has been falling even though the number of units sold are rising. This is due to higher contribution of small and mid-sized TV’s to the product mix.

Also, we think that the market may have ignored the revised free cash flow guidance issued along with the holiday sales figures. Best Buy now expects free cash flows of approximately $500 million, as compared to the earlier guidance figure of $850 million to $1.05 billion provided in November.

What Are The Positives?

The better than expected results seem to have raised hopes that Richard Schulze would find it easier to convince private equity investors to fund a buyout offer for Best Buy. The deadline for making such an offer has been extended until the end of February from December 16 earlier. The speculation at the time of the extension suggested that both parties wanted to see how the company performed during the holiday season. A strong result could strengthen Best Buy’s hand in negotiating a higher valuation for the company while Schulze might find it easier to convince skeptical investors to put up money. Now that the results seem to be encouraging, things may move forward on this front.

The fourth quarter earnings results for Best Buy are scheduled to be announced on February 28, which is when the deadline given to Schulze expires. We will keep track of any further developments on this front.

We have a price estimate for Best Buy of $16 after the third quarter earnings results.

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

1. Best Buy Shares Rally on Holiday Sales, WSJ [↩]
2. Best Buy Announces Holiday Revenue Results, Best Buy News Release [↩]
3. Best Buy Shares Rally on Improved Holiday Sales, New York Times [↩]