Analyst Preview: Best Buy December Sales

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Best Buy (NYSE:BBY) will release December sales results (5-weeks ending December 31) before the market opens on Friday, January 6. Similar to the past, Best Buy will not have a conference call to discuss results.

We expect the company to report December comps of roughly flat, above our fiscal Q4:11 comps estimate of down 1.8% (down 2.4% domestically, up 0.4% internationally). Similar to Q3:11, Best Buy likely tried to drive domestic comps through increased promotional activity, deep discounts (directly before and after Christmas), and value items. In addition, Best Buy faces manageable December 2010 comps (down 4.0% worldwide, 5.0% domestically, and 0.1% internationally).

We expect Best Buy to maintain FY: 12 guidance for revenue of $51.0 – 52.5 billion, comps of down 3% to flat, and EPS of $3.35 – 3.65, which implies Q4 guidance for revenue of $16.6 – 18.1 billion and EPS of $2.06 – 2.36. We note that the guidance was provided on December 13, presumably after the company had assessed its performance for the first half of the month. We expect Best Buy’s Q4 performance to deteriorate after flat comps for December (as discounting ends).

The Computing and Mobile Phones segment is likely to experience continued domestic growth (up 8.8% in Q3). Popular items should include the Apple (NASDAQ:AAPL) iPhone 4S, iPads, and (NASDAQ:GOOG) Android tablets. Negative momentum in Best Buy’s other segments (apart from Appliances) should continue until a major product upgrade cycle.

However, we remain cautious on Best Buy shares. Best Buy seems aloof to declining comps in CE and Entertainment, focusing on growth segments (primarily Computing and Mobile Phones) instead. Also, despite recent temporary price cuts, we believe Best Buy remains committed to its premium pricing strategy, preferring limiting earnings erosion over growing share. Without a major product upgrade cycle or a permanent revision to pricing, share losses will continue, in our opinion. In addition, a bloated big box business model will limit competitiveness and profitability.

Maintaining our NEUTRAL rating and 12-month price target of $25, which reflects a P/E multiple of ≈ 7x our FY: 13 EPS estimate of $3.50. This multiple is below Best Buy’s historical 12–15x multiple primarily due to slowing growth.

Michael Pachter is an analyst at Wedbush Morgan.

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