Electronics titan Best Buy (NYSE:BBY) is currently getting knocked around as consumers remain in touch with the softer side of their spending enthusiasm. Yet BBY continues to use its dominance during the economic downturn to muscle out weaker rivals and has only a few potential risks that could derail its plans for global consumer electronics dominance.
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Recent Results
Best Buy's total revenue advanced 12% to $11 billion and the company continued to benefit from the addition of revenue related to Best Buy's collaboration with Carphone Warehouse and the creation of Best Buy Europe. The opening of 170 new stores offset negative currency fluctuations and a same-store sales decline of 3.9% at the existing store base. In comparison, one of Best Buy's smaller rivals, hhgregg (NYSE:HGG), had a 14.7% comparable store in its most recent quarter.
Traffic and Growth
Traffic at domestic stores grew slightly due to the demise of archrival Circuit City and smaller players like Rex Stores (NYSE:RSC), which recently announced it was closing its retail store base. As well, stabilizing consumer sentiment served to offset another compression in average ticket prices. Management cited continued strength in flat-panel televisions (mid single-digit comps), mobile phones and notebook computers, but weakness in the digital camera, music and movie categories. Overall, the company estimates that it was still able to grow market share 270 basis points.
Reported Earnings Fall
International top-line results were boosted by Best Buy Europe, but a higher cost structure was a primary culprit for the reported geographic operating loss of $35 million. In stark contrast, the domestic segment posted operating income of $315 million, which was still down from last year's second quarter on higher SG&A costs. Overall, reported earnings fell 22.9% to 37 cents per diluted share.
Management expects the more established domestic store base to drive overall gross profit improvements for the full year and upped its earnings guidance to between $2.64 and $2.94 per diluted share, as it has more confidence in sales trends for the remainder of the year.
Bottom Line
The market looked favorably upon Best Buy's increased guidance, and recent market share gains are only solidifying its dominance as the largest and most profitable domestic electronics franchise. The only potential threats at home depend on whether Wal-Mart (NYSE:WMT) continues to muscle into electronics or if the industry fails to innovate and replace the flat-panel demand that will eventually wane. Best Buy's dominance is much less certain overseas, but at under 13 -mes forward earnings expectations, these risks are arguably already built into the current share price. (To learn more, read Analyzing Retail Stocks.)
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