Best Buy Lowers Fiscal 4Q16 Outlook after Dismal Holiday Season

Best Buy Stock Dives 10% on Dismal Holiday Sales

(Continued from Prior Part)

Valuation affected by holiday season

Best Buy’s (BBY) dismal holiday sales made the company lower its outlook for the fourth quarter of fiscal 2016, which ended January 30, 2016. This also affected the company’s valuation. As of January 14, 2016, Best Buy (BBY) was trading at a 12-month forward PE (price-to-earnings) ratio of 9.6x, down 9.4% from the previous day due to the impact of a weak outlook.

Rivals GameStop (GME), Aaron’s (AAN), and Conn’s (CONN), were trading at a forward PE of 6.5x, 9.1x, and 10.1x, respectively, as of January 14. Best Buy is also trading at a lower valuation compared to the S&P 500 Consumer Discretionary Index (forward PE of 16.8x) and the S&P 500 Index (forward PE of 15.4x). Best Buy is 0.4% of the Consumer Discretionary Select Sector SPDR Fund (XLY).

Fourth quarter sales outlook

Following its lower holiday sales announced on January 14, 2016, Best Buy expects its overall revenue to fall ~4% compared to the previous outlook of a low single-digit decline. In its domestic segment, the company expects a revenue decline of ~1.5% in 4Q16 compared to the previous outlook of flat revenue. This downward revision is a result of softer consumer demand in mobile phones and greater-than-expected declines in the NPD-reported categories. The company expects the shift of the Super Bowl event into the first quarter of fiscal 2017 to have an adverse impact of 40 basis points on 4Q16 revenue.

Improved operating income rate outlook

Best Buy made an upward revision to its 4Q16 operating income rate outlook. The company attributed this improvement to a disciplined promotional strategy and strong expense management. The company expects its overall operating margin to fall ~15 to 30 basis points compared to the previous guidance of 25 to 45 basis points. The 4Q16 Domestic segment’s operating margin is expected to fall 10 to 15 basis points, compared to the previous guidance of a 20 to 35 basis points decline.

For its International segment, Best Buy continues to expect a revenue decline of 30% due to the impact of the ongoing Canadian brand consolidation, currency headwinds, and subdued demand in the Canadian market. The company expects an adjusted operating margin in the 2.0% to 3.0% range.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Best Buy’s Weak Mobile Phone Sales Drag Down Holiday Results

• Part 2 - Best Buy’s Domestic Segment: What Affected Holiday Revenue?

• Part 3 - Best Buy’s International Holiday Sales: Not Exactly Holly Jolly