Best Buy: There's Nothing Quite Like Being a Retailer During a Recession

Oh to be a Electronics Retailer during a recession, roughly as sought-after a profession as 'Big 3 personal flight crew', after that first trip to Washington. But Best Buy (BBY) is holding on in the midst of turbulence while its main competitor has all but bowed out. With Circuit City Stores (CCTYQ) trading OTC and trying to stay afloat, BBY would seem to be serving for the match. If only customers would come to the stores and buy, that is.

With profits down 77% year over year in the latest quarter, it appears on the surface Best Buy is facing some troubles of its own. But the company is being run effectively despite consumer spending reports that are on record as the worst since the early 30s.

So to the numbers: Quarterly profits of $0.13/share ($0.35/share excluding special items) were better than expected. Analysts had the numbers pinned at $0.24/share excluding special items. Revenue also topped expectations at $11.5Billion vs. $11Billion estimated. For retailers the all-important same-store-sales metric was watched closely and Best Buy numbers fell about 6% for stores open longer than 1 year. Now in this environment, a 6% drop has to be put in perspective and seen as a slight positive. Overseas sales rose slightly, fueled by growth in mobile phones. So, somewhere, something has people buying. Nonetheless, Best Buy is taking a cost-cutting approach to share price appreciation, offering buyouts to thousands of employees and slowing store growth in North America and China. Best Buy hopes to cut capital costs by 50% over next year. Certainly ambitious!

For those workers who don't accept the buyouts, there will certainly be job cuts ahead at Best Buy Corporate. The outlook is much brighter for shareholders though, as cost cuts will certainly help profitability in a tough 2009, and the fact that Best Buy kept its lowered profit forecast intact helped matters as well.

The company expects to meet its range of $2.30-$2.90 (a wide range to be sure for the year through February) and falls in line with analyst estimates of $2.47 for the year. The positives in this report propelled shares higher by $2.50 at the end, and the Fed rate-cut fueled shares to close higher by 18% ($4.21/share). This also notched the BBY P/E ratio to near 9, which is reasonable in most respects but perhaps not in this climate. (See earnings call transcript.)

Nonetheless, the retailer should trade in a P/E range of high single-low double digits going into 2009, so while today's rise (and its recent climb from $17) makes Best Buy less attractive on a valuation basis, the competitive landscape clearly leans heavily towards BBY, making it an attractive hold for when America rises from the consumer spending blues.

For those on the fence, it will likely be available for the mid $20s soon, which makes it a steal for the next year and a half.

Disclosure: Author is long BBY

Comments

[Coventry:]

Cutting jobs to boost share price? I won't be spending any dollars at Best Buy!

2008 Dec 17 12:03 AM

[pro2know:]

Every company has to cut expenses, especially in hard economic times. No jobs have been cut as of now - only voluntary buy-outs, which are larger than typical severance packages from BBY. All the Buy-outs are for corporate, non-customer facing employees. I applaud BBY for cutting at the top, instead of potentially causing customer disappoints by axing store level employees.

Aren't going to spend your money there? That's your choice. However, with often-overpriced Mom & Pop locations going out of business left and right, and Circuit City on the brink of no return, I ask - where else are you going to go? Wal-Mart? You're upset at BBY for cutting corporate jobs, yet you would rather give your money directly to a company who can't stay out of controversy for forcing employees to work off of the clock, hiring illegal alien workers, and refusing to buy products from just about anywhere except China?

I don't see your logic.........


On Dec 17 12:03 AM Coventry wrote:

> Cutting jobs to boost share price? I won't be spending any dollars
> at Best Buy!

2008 Dec 17 01:01 AM

[Jack K:]

I like Best Buy and will continue to shop there. But I love Walmart. I think that a lot of the negatives about it are overblown, generally coming from liberals who don't like it, and from people who are mad at it because they are not unionized. I don't care what the above poster thinks about Walmart and he may not be a liberal, but most of the anti Walmart people are. None of our local Walmarts hire illegals, and the workers there are generally simple people who appreciate the fact they have a place to work and make a living. Target buys most of their products from China. So does Sears. Very few clothing stores sell US made goods.

2008 Dec 17 06:47 AM

[billddrummer:]

I'm a part-time worker at BBY (store) and have noticed lower market baskets, fewer impulse buys, more budget-conscious shoppers and less willingness to upgrade.

Having said that, people are still shopping. And as long as they do, BBY will be there to serve them.

2008 Dec 17 03:47 PM