Best Buy Issues Weak Q2 Outlook

Best Buy Issues Weak Q2 Outlook
May 31, 2016

Last week, the electronic goods retailer Best Buy Co., Inc. (NYSE:BBY) reported its fiscal 2017 first-quarter earnings and revenue that exceeded analysts’ expectation by a wide margin. In spite of reporting better than expected results, the stock is hardly moving. The discussion below throws a light on the issues faced by the company and provides the reason to stay away from investing in the company’s shares as of now. The share price of Best Buy closed low on Monday.

The reported fiscal 2017 first-quarter revenue of $8.443 billion was higher than the analysts’ estimates of $8.330 billion. However, it should be noted that the revenue was below the $8.558 billion recorded in the similar period of fiscal 2016.

Similarly, during the first-quarter, the non-GAAP net earnings of the company increased to $144 million, from $131 million reported in the first-quarter of fiscal 2016. Correspondingly, the earnings per share increased to $0.44, from $0.37 in the year ago corresponding period.

The reported non-GAAP earnings were certainly above the analysts’ estimates of $0.35 per share for the first quarter. However, the market is concerned that the aggressive share buy backs have largely contributed to an increase in the earnings on a per share basis.

The comparable same store sales for the quarter ended March was down 0.1% compared to a 0.6% increase in the sales in the first-quarter of fiscal 2016.

For the fiscal 2017 second-quarter, Best Buy anticipates revenue ranging between $8.35 billion and $8.45 billion. On a y-o-y basis, this corresponds to a decline in the range of 2.1% to 0.9%. The company also expects a 5% to 10% decline in the international revenue.

As far as second-quarter earnings are concerned, Best Buy anticipates non-GAAP diluted earnings in the range of $0.38 to $0.42 per share. The company’s forecast is way below the second-quarter earnings of $0.49 reported in the last fiscal year. On an average, the analysts anticipate earnings of $0.50 per share for the second-quarter.

As mentioned earlier, the company has bought a huge chunk of shares last year through the buyback program. The diluted share count has decreased to 325 million at the end of first-quarter, compared to 354 million last year. On a y-o-y basis, the difference in the share count contributes $0.04 to the non-GAAP earnings of the company. Thus, using a constant share count would further decrease the earnings per share. So, fundamentally, the shares remain range bound with bearish bias.

The price chart shows a strong resistance zone between 33.50 and 35.50. The stochastic indicator remains almost flat. The next major support exists at 28. Thus, during the second quarter, we can expect the stock price to remain range bound between 28 and 32.

Technical Analysis - 31st May 2016

So, a one touch put option should be the contract of choice for an option trader. A target price of $28 or higher should be chosen is recommended for the trade. Ideally, a four week time frame is necessary for the price action to reach the target. Thus, it would be wise to pick up a contract expiring in the last week of June.


Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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