What Wall Street Missed in Best Buy's Earnings

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Updated from 8:34 a.m. EDT

NEW YORK ( TheStreet) -- Best Buy wasn't expected to light it up financially in the second quarter as sluggish demand for mobile phones and tablets weighed on results. Even considering Wall Street's low expectations, Best Buy 's results were still a disappointment.

Watch the video below for a closer look at Best Buy's latest quarterly results:


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Best Buy shares fell 5.1% to $30.35 in midday trading on Tuesday. But Wall Street may be underestimating the company's financial potential during the all-important holiday season as it implements initiatives designed to improve customer service.

The electronics retailer reported adjusted earnings of 44 cents a share vs. the Bloomberg consensus of 31 cents, marking the seventh straight quarter that Best Buy eclipsed Wall Street forecasts. However, despite domestic online sales growth of 22%, which followed a 29.2% increase in the first quarter, net sales of $8.9 billion fell short of the consensus of $8.98 billion. The culprit for the shortfall was a 2.7% decline in same-store sales, which came in 50 basis points below Wall Street's estimates.

Domestic and international same-store sales declined 2% and 6.7%, respectively, with President and CEO Hubert Joly noting "traffic to our brick and mortar stores continued to decline."



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Best Buy found another $40 million in cost savings related to its "Renew Blue" restructuring plan, on top of $95 million in savings in the first quarter, and reiterated its target for savings of $1 billion of which $900 million has been realized thus far. On the earnings call, Chief Financial Officer Sharon McCollam acknowledged the slowing pace of expense savings but highlighted the opportunity to save north of $300 million looking out to 2016 through better management of merchandise returns. That could bring Best Buy's total restructuring target under "Renew Blue" to more $1.3 billion when it's completed.

Here are three things that initially spooked Wall Street:

Domestic segment: With a 2% domestic same-store sales decline in the second quarter, the rate of decrease quickened on a sequential basis even as Best Buy called out higher "in-store conversion" in the quarter and has closed the pricing gap with rivals Amazon and Walmart via a new price-matching program. Same-store sales in the domestic segment declined 1.3% in the first-quarter of this year, after a 1.2% fall during the holiday season of 2013.

Further, gross profit margins for the segment contracted 390 basis points year over year, or 50 basis points adjusted for one-time items, due to a sales mix shift to lower margin departments such as gaming and computing, as well as continued price investments. In the first quarter, gross profit margins declined 70 basis points year over year.