Shares of Best Buy (NYSE: BBY) got slammed yesterday after failing to meet the street's expectation for their third quarter earnings. The company blamed the shortfall on high costs associated with remodeling stores:
"We entered this quarter with very ambitious plans for organic growth and transformation activities," said Brad Anderson, vice chairman and CEO of Best Buy. "We invested aggressively in a portfolio of initiatives. Specifically, we converted a record number of segmented stores, launched Best Buy Canada into Quebec and expanded our services business. Clearly, we over invested in certain transformation activities. As a result, our SG&A spending was unacceptably high. We are evaluating our spending to increase the yield and will edit activities that aren't delivering results."
Reuters Nicole Maestri repeated that claim:
Best Buy, as part of its "customer centricity" initiative, has been converting stores to a new "segmented" format that tailors products for specific shoppers and it is expanding its "Geek Squad" business, which offers consumers help with technology related issues. It said that, in the quarter, it opened or converted 154 segmented stores, giving it a total of 284 such stores in the United States.
But the aggressive conversion effort took a toll on its results, with expenses rising $289 million, and the company calling its selling, general and administrative expenses "unacceptably high."
But would the market really have slammed the stock by 11%, yesterday, just for expanding their "Geek Squad" business? Doubtful.
The McGuffin stands out early in the report:
Gross profit dollars increased 16 percent to $1.8 billion, fueled by revenue growth and a 120-basis-point improvement in the gross profit rate. The improvement included a 30-basis-point benefit (or $0.04 per diluted share) related to the initial recognition of gift card breakage (gift cards sold but not expected to be redeemed). The gift card breakage was recognized in revenue.
Got that? Best Buy decided to take an extra $.04/share in earnings, simply by generously assuming that that much in sold gift-cards would never get redeemed. How do they know they won't get redeemed? Who knows. It's nice that this counts as revenue, as those dollars fall straight to the bottom line. Undoubtedly, aggressive spending increased costs (duh), but the problem for Best Buy is on the top line, and that's what the market rightly focused on.
Does anyone happen to know what Cramer's take on this one has been?