Best Buy Earnings Preview: Expectedly Low Bottom Line To Be The Key Feature Of Q1

Last fiscal year turned out to be great for  Best Buy (NYSE: BBY), despite continued competitive pressure from online retailers. Key factors driving this performance were   strong multi-channel execution and cost reductions that were part of the Renew Blue initiative. As of FY 2015 end, total Renew Blue cost reductions amounted to $1.02 billion.

Almost three months fast forward, the company is about to announce results for the first quarter of FY 2016 on May 21st. (Fiscal years end with January.) According to the company, this fiscal year will continue to see weak industry demand in certain product categories and price pressures from competitors. On the Because the company’s margins are already under pressure, this will pose a challenge.   However, Best Buy has found more opportunities for cutting costs to counter these forces, which it announced recently as phase two of the Renew Blue initiative.

While these are rather longer term trends that will decide Best Buy’s fate, in this article, we will take a look at a few factors that that likely impacted the company’s Q1 FY 2016 results. Our price estimate of $34 for Best Buy is almost at par with the current market price.

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Online presence is becoming increasingly important for Best Buy. It was the third most visited website in the U.S. during the most recent holiday season ^[1]. Out of $10.1 billion in domestic sales during the 9-week holiday period, $1.5 billion occured online ^[2]. To make its online platform much more robust (to cater to such high demand), the company plans to continue investing in the transformation of its e-commerce technology platform. Until Best Buy streamlines its online operations, these investments will continue to hurt margins.

Overall, investments in growth initiatives are expected to amount to approximately $100 million to $120 million. The focus of the effort will be on:  1) Customer experience improvements; 2) Information technology; and, 3) Marketing.   The company also expects to increase capital expenditure to approximately $650 million to $700 million in FY 2016 from $550 million in FY 2016 ^[3].

One-Time Expenses Due To Consolidation Of Operations In Canada

Some additional one-time expenses also were likely to have negatively impacted the bottom line in the quarter. In late March, Best Buy announced that it would now operate under the name of only one brand in Canada. As a part of this move, it announced that 66 Future Shop locations would be closed with immediate effect and an additional 65 Future Shop stores will be temporarily closed for one week as they begin their transition to the Best Buy brand.

While the net result of this consolidation is that half of the Future Shop stores will be closed, Best Buy stated that there will be no affect on its presence in the market due to existing redundancies. It discovered that a significant number of its Future Shop and Best Buy stores are located adjacent to each other, often in the same parking lot, which it sees an opportunity to cut down operating costs.

Best Buy expects to post restructuring charges and non-restructuring impairments of between C$250-million and C$350-million (U$200-million to U$280 million). Furthermore,  the company announced that investments of up to $200 million dollars will be made in Best Buy (Canada) stores and BestBuy.ca, to build a leading multi-channel customer experience.

 

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– Margin Pressure?http://www.fool.com/investing/general/2014/07/02/can-rite-aid-and-walgreen-overcome-this-threat.aspx

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