Tags: Best | Buy | squeezed | BBY

Best Buy Profit Squeezed by Online Competition

Tuesday, 10 Jan 2012 07:44 AM

By Tim Plaehn

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Consumer electronics retailer Best Buy (BBY) touts its multichannel sales system as a competitive advantage. However, in recent quarters, that advantage has not been apparent as a combination of slow economy and online competition has squeezed profit margins.

Best Buy is the largest consumer electronics retailer, with operations in North America, Europe and Asia. The company as about 1,400 locations in the United States, 2,400 in Europe, 250 in Canada and Mexico and 171 in China.

Just over 70 percent of revenue is generated from the U.S. stores and the balance is from the international locations. Online sales come from BestBuy.com and several owned specialty online sites.

The Best Buy business model is to attract customers through a combination of store locations, online sales, mobile service and customer call centers.

For the first three quarters of the Best Buy 2012 fiscal year, which ended on Nov. 26, the company reported revenue of $34.4 billion, up from $34 billion a year earlier. Net income for the three quarters was $1.23 per share, down from $1.50 in 2011.

Like many retailers, Best Buy earns the bulk of its profits in the holiday fourth quarter. The consensus earnings estimate for the fourth quarter is $2.18 per share, compared to actual earnings of $1.98 in 2011.

Cash still flows

In spite of flat sales results, Best Buy generated $2 billion of free cash flow in the first three quarters of fiscal 2012. The quarterly earnings report stated this was significantly higher than a year earlier. Year-to-date the company had used $1.2 billion of that cash to buy back shares.

Cash on the balance sheet at the end of the quarter was $2.39 billion, up from $925 million a year earlier.

Best Buy picked up some negative news coverage in the fourth quarter when it slashed prices in its online sales promotions to compete with Amazon.com (AMZN) and Wal-Mart (WMT).

The move resulted in more orders over the Thanksgiving weekend than the company could fill. After Best Buy admitted to canceling a significant number of received orders, Michael Pachter, an analyst at Wedbush Securities, noted customers may shy away from ordering online from the company in the future.

The company next reports on March 29.

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