Earlier this week Best Buy (BBY) reported an increase in earnings per share, while at the same time, reported net income actually declined. In the company's earnings release they reported a significant level of stock buyback activity. For the year the company repurchased 75.6 million shares of stock or nearly 16% of the shares outstanding. The cost of the buyback to the company was an estimated $3.5 billion dollars.
As an investor one needs to ask if this level of buyback is an indication by the company/board of future business prospects. If the company had committed to paying a higher dividend on an ongoing basis, this could have been viewed more positively. A higher dividend payment might be an indication the company sees sustainable earnings growth out into the future. The buyback is a one time activity; thus, not committing the company to higher cash outflow going forward. Therefore, are there clues in the financial reports that might indicate a slowing in the business?
The company has yet to file its 10-K, but they plan on filing by the end of April. One can look at some of the financial information included in the 8-K to get a sense for the business activity. One piece of information to note is merchandise inventory saw an increase of almost 17% as noted below. This rate of increase compares to an increase in revenue of 4% when comparing the quarter ending 3/1/2008 to the same quarter last year. It should be noted that the 4th quarter included one less week than last year. Adjusting for this difference, revenue would have increased 9%. So, is inventory at a higher level than the company anticipated due to sales not meeting the company's expectations? Also, will this inventory need to be cleared out of stores at lower selling prices; thus impacting future margins and earnings? The company does note in the 8-K that it has seen a shift in customers' desire for higher ticket items like gaming systems.
As an investor one needs to ask if this level of buyback is an indication by the company/board of future business prospects. If the company had committed to paying a higher dividend on an ongoing basis, this could have been viewed more positively. A higher dividend payment might be an indication the company sees sustainable earnings growth out into the future. The buyback is a one time activity; thus, not committing the company to higher cash outflow going forward. Therefore, are there clues in the financial reports that might indicate a slowing in the business?
The company has yet to file its 10-K, but they plan on filing by the end of April. One can look at some of the financial information included in the 8-K to get a sense for the business activity. One piece of information to note is merchandise inventory saw an increase of almost 17% as noted below. This rate of increase compares to an increase in revenue of 4% when comparing the quarter ending 3/1/2008 to the same quarter last year. It should be noted that the 4th quarter included one less week than last year. Adjusting for this difference, revenue would have increased 9%. So, is inventory at a higher level than the company anticipated due to sales not meeting the company's expectations? Also, will this inventory need to be cleared out of stores at lower selling prices; thus impacting future margins and earnings? The company does note in the 8-K that it has seen a shift in customers' desire for higher ticket items like gaming systems.
(click on table for larger image)
Best Buy is the premier electronic retailer, but these items are worth watching.
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