Best Buy Co. (BBY) operates as an e-commerce and physical retailer of consumer electronics mainly in the United States, Europe, Canada, and China. Best Buy has reported a loss for its fiscal-first quarter as it sold its stake in Best Buy Europe and is working on restructuring plans. The company has been struggling in recent years due to an increase in intense competition from online retailers and discount stores. In order to cope with this situation, the company has been working on a restructuring plan that includes closing some stores, reducing costs and providing training to its employees. In such an effort, in April 2013, the company sold 50 percent of its stakes in its European division in order to streamline its business.
Another main reason why it's lagging behind its competitors is that today most customers prefer to research product prices online before going to buy products from the store, and according to Best Buy CEO Hubert Joly, the company's e-commerce offerings and searching tools are not efficient enough to help customers conveniently find and compare prices online.
Best Buy historic price:
The above chart shows the performance of Best Buy and two of its competitors, Amazon.com (AMZN) and Wal-Mart (WMT), since the beginning of FY13. The stock price of Best Buy has clearly outperformed its competitors' price appreciation of 0.24 percent and 10.03 percent, as shown in the chart, respectively. The most important thing to note here is that the stock price appreciation is evidently reflecting Best Buy's recent restructuring effort, but ignoring the financial performance of the company in recent years. Put simply, it's just the company's historic performance based on its restructuring efforts. The financial performance tells a different story altogether.
In order to analyze the company, the financial health of the company is very important.
Analyzing margins and revenue growth.
The above table indicates the company's revenue growth and profit margins over the years. We can clearly see that over the past few years the company's margins were quite depressing. And the company was able to generate CAGR of 3.02 percent revenues over the past four years, which is quite alarming.
The above table explains a breakdown of the company's ROE into three parts including net margin, asset turnover and financial leverage. It is important to note that all the above ratios illustrate disturbing results for investors. Firstly, the ROE is showing an extreme downward trend since FY10. Secondly, the decreasing ROE is supported mostly by net margins and its increasing financial risk, which is reflected by the higher financial leverage ratio. Though asset turnover has slightly increased from FY11 to FY12, the impact was overcome by higher financial leverage and negative net margin.
This table shows the efficiency ratios of the company. As I mentioned earlier regarding the rising debt, which can clearly be seen in the higher debt-to-equity ratio. This means that the business is getting riskier. Second, the increasing day's sales outstanding indicated that it took more days for the company to collect its accounts receivables; on the other hand the payable period was almost stable over the years. Third, the increase in inventory is also an alarming sign for a company like Best Buy because most of its competitors (online retailers) have limited inventory to maintain. So the overall cash conversion cycle is increasing over the years, meaning its cash flow is stuck in the market for a longer period.
For the short term Best Buy managed to attract investors by showing its restructuring efforts to strengthen its balance sheet figures, but it's not the long-term solution to maintain its attractiveness, rather a short-term one. Selling stores and cutting costs are not a long-term solution to maintain integrity in the eyes of investors. It should be creative and generate new ideas to attract more customers, like Wal-Mart did recently with Warner Bros. It signed a deal with Warner Bros. to promote its movie "Man of Steel." It's a great step to increase foot traffic in its stores. Furthermore, its financial position over the past few years has been very disappointing, which is very alarming for the company. Therefore, I conclude that it's in the best interest of investors to short or sell this stock.