Best Buy Company, Inc. (BBY - Analyst Report) reported third-quarter fiscal 2015 adjusted earnings from continuing operations of 32 cents per share that came miles ahead of both the Zacks Consensus Estimate of 25 cents and the year-ago quarter figure of 18 cents.

Best Buy Co , Inc - Earnings Surprise | FindTheBest

Including one-time items, the company reported quarterly earnings from continuing operations of 30 cents per share, up from 12 cents per share reported in the prior-year quarter.

Total revenue grew 0.6% to $9,380 million and came ahead of the Zacks Consensus Estimate of $9,095 million. Comparable-store sales (comps) were up 2.2% compared with a 0.3% rise in the prior-year period.

Renew Blue transformation program and strength seen in key product drivers like TVs, gaming, appliances, computers and tablets in the quarter helped Best Buy to post better-than-expected quarterly results. As a result, shares gained 6.6% in the pre-market trading.

Under the program the company has achieved an additional $65 million worth of annualized savings in the quarter taking the total annualized cost reductions to $965 million. At the end of fiscal 2014, the company had raised its target of cost reduction to $1 billion.

However, gross profit slid 1.3% year over year to $2,128 million during the quarter due to competitive pressure and strategic pricing. Gross margin contracted 40 basis points (bps) to 22.7%. Nevertheless, lower selling, general and administrative expenses led to a substantial year over year rise in operating profit that stood at $190 million while operating margin increased 100 bps to 2%. On an adjusted basis, operating margin grew 80 bps to 2.2%.

To combat its dismal financial run, Best Buy had reinforced a turnaround strategy called the Renew Blue transformation program to rein in escalating costs and increase online traffic as well as store conversion rate. Though industry trends do not look encouraging, we believe this strategy is helping the retailer to bail it out.

Segment Details

Domestic segment revenues grew 2.3% to $7,992 million due to a 3.2% increase in comps.

Comparable-online sales rose 21.6% driven by improved traffic, increased average order value, and availability of better inventory due to the company’s ship-from-store and online distribution center expansion. Domestic online sales were $601 million.

Growth witnessed in computing, TVs, gaming and appliances more than offset the decline in categories like tablets, services and mobile phone.
 

The segment’s adjusted gross profit grew 0.3% to $1,841 million during the quarter, while adjusted margin came in at 23%, down 50 bps due to unfavorable product mix, structural investments and unfavorable impact of new credit card agreement.

International segment revenues dropped 8.4% to $1,388 million due to the closure of big box stores in China and Canada in the prior year, a decline of 3% in comps (mainly China) and unfavorable fluctuations in foreign exchange rates.

The segment’s gross profit declined 10.6% to $287 million in the quarter while margin shrunk 50 bps to 20.7%, owing to lower margin product mix (gaming) and increased promotional activities in Canada.

Other Financial Details

This Zacks Rank #1 (Strong Buy) stock, which competes with Aaron's, Inc. (AAN- Snapshot Report), RadioShack Corp. (RSH - Analyst Report) and Conns Inc. (CONN -Snapshot Report), ended the quarter with cash and cash equivalents of $1,929 million, long-term debt of $1,591 million and total equity of $4,573 million.

Guidance

Increasing revenue share from lower margin categories, aggressive promotional backdrop and higher incentive compensation are some of the factors that might run down the benefits from Renew Blue, SG&A and other initiatives. As a result management expects revenues and comps to remain almost unchanged year over year in the fourth quarter of fiscal 2015.

However, gross profit margin is expected to rise in the fourth quarter of fiscal 2015. Moreover, in the upcoming quarter, there would be a negative impact of 9—10 cents on earnings due to an adjustment related to tax structure in the first quarter.