Posted on Monday, 21st June 2010 by James Martin

Best Buy (BBY)

Shares of Best Buy Company Incorporated (BBY: Charts, News, Offers) took a six percent dip last week after reporting a net profit of $155 million or 36 cents a share for the three months ending in May. The per-share profit was identical to the amount posted a year ago during the same period: 36 cents. The problem was that the analysts had projected a profit of 50 cents per share.

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Stock Analysis

This was a big miss. Especially considering that one of Best Buy’s strongest competitors went out of business during the last period. Best Buy should have seen gains as the choices for consumer electronics became more limited. Instead, sales have remained flat. Possible reasons include the once-again slowing economy or even increased pressure from Best Buy’s other competitors: Wal-Mart (WMT: Charts, News, Offers) and Target (TGT: Charts, News, Offers) electronics, Radio Shack (RSH: Charts, News, Offers) and Amazon.com (AMZN: Charts, News, Offers).

To make matters worse, administrative overhead increased to 23% of revenue, up from around 22% a year ago. On the face, it looks like Best Buy is spending more in order to generate the same amount of revenue. However, the increased spending to hire back employees and expand operations could be in anticipation of larger sales ahead. Jim Muehlbauer, Executive VP and CFO implied this theory in his statement on full year guidance for Best Buy: “While our financial results in the fiscal first quarter were below expectations, we remain confident that the strategic investments we are making will deliver more robust connected solutions for customers and support increased margin expansion during the fiscal year. We continue to expect solid top-line growth and expansion of our annual operating margin to approximately 5 percent of revenue in fiscal 2011.”

Where will Best Buy look to increase revenue? The quarterly report indicated that Best Buy saw increases in notebook computers, mobile phones and appliances. Sales of mobile phones in particular seem like an area that Best Buy can exploit. There are few stores that offer variety of plans, brands and phones as Best Buy. Best Buy has agreements to sell mobile phones for Verizon (VZ: Charts, News, Offers), Sprint (S: Charts, News, Offers), AT&T (T: Charts, News, Offers) and T-Mobile making their stores a great place to comparison shop for wireless communication. Smartphones might hold the key for Best Buy as they sell versions of all of the most popular smartphones: Blackberry, iPHone (including iPhone4), the Android phones and the new Sprint EVO. Best Buy secured the ability to exclusively offer the brand new Sprint HTC EVO mobile smartphone – in white. We cannot be sure how important this will be for Best Buy since their agreement only covers one color of the phone, but exclusive rights any form of one of the hottest phones in the market will help the Best Buy Mobile division.

Best Buy is also seeking to expand its role in the video game market, by taking a page from Gamestop (GME: Charts, News, Offers) and allowing customers to return used games in exchange for “Best Buy dollars”. For years, gaming enthusiasts have purchased new games, played them and then sold the games back to Gamestop. In fact, this practice made up 27% of Gamestop’s business in the last quarter. Best Buy has historically only dealt with new games, but by the end of the summer, used games sold under their standard return policy will hit the shelves in the Big Blue Box. Best Buys is also seeking to expand its share of the gaming market with the launch of @Gamer, the official gaming magazine of Best Buy.

Was the Best Buy earnings report an indicator of a downturn in the overall economy or is their increased spending a harbinger of future business? Only time will tell.

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