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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Best Buy (NYSE:BBY) will report its fiscal Q3:13 (October) results before market open on Tuesday, November 20, and host a conference call at 6am PT (877-941-9205, conf. ID: 4573748, or webcast at http://www.investors.bestbuy.com).
We expect Q3 results at the low end of the pre-announced range. On October 24, Best Buy pre-announced Q3 results for same-store sales of down 5.3% – 3.2%, gross margin down 100bps y-o-y, and SG&A margin growth in the low single digits. We expect results below our estimates for revenue of $11.5 billion vs. consensus of $10.7 billion, comps of down 5.3%, and EPS of $0.14 vs. consensus of $0.12. Management did not provide EPS guidance, but expects a significant y-o-y decline, reflecting a number of initiatives designed to drive traffic and improve service, such as free shipping, employee training, and price matching through the holidays.
Best Buy’s analyst and investor conference earlier this week made no mention of the quarter’s results, suggesting to us that things were pretty bad. New CFO Sharon McCollam starts her assignment in December, suggesting to us that results will be weak, and guidance even weaker for Q4. CEO Hubert Joly commented at the analyst event that Ms. McCollam had “never missed a quarter”, implying to us that the bar will be set very low for Q4. We expect disappointing results and weak guidance to pressure Best Buy shares, with further earnings pressure once the company begins spending on new initiatives.
We believe Best Buy’s declining free cash flow limits the potential for private equity investment. We calculate that Best Buy generated approximately $2 billion in free cash flow in FY:12, and we expect it to generate at most $1.6 billion in FY:13. Best Buy’s plans relayed at its analyst day sounded to us like a road map for a private equity buyout, absent any mention of asset sales. However, weak guidance could put the cash flow decline at over $500 million, making a bid at the proposed $24-26 level virtually impossible. We expect former chairman and current suitor Richard Schulze to comment following the earnings release.
We reiterate our UNDERPERFORM rating and 12-month price target of $14.50, which reflects low visibility, lack of FY:13 guidance, our view that a takeover is unlikely, and our doubts about the company’s turnaround plan. We believe Best Buy has been unable to stem sustained comp declines and eroding margins, and remains at a significant disadvantage to its lower-priced and lower-cost peers. Our price target reflects a P/E multiple of ≈ 5x our FY:14 EPS estimate of $2.90, and is well below Best Buy’s historical 12-15x multiple.
Michael Pachter is an analyst at Wedbush Securities.
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