Can Best Buy Continue To Rally?

| About: Best Buy (BBY)

Best Buy Company Inc. (NYSE:BBY) is the largest specialty electronic retail store in the world. It sells electronic devices such as televisions, DVDs, video equipment and digital cameras. The company has a market cap of $11.92 billion, and its stock price is around $35.

Best Buy reported second quarter earnings for the period ending on July 31, on August 20. The store reported sales of $9.3 billion, which was a 13% decrease from revenues of $10.5 billion, in the second quarter of 2012. The company's net income was $237 million, a big year-over-year improvement from net income of $14 million in 2012. The store reported earnings per share (EPS) of $0.77 up from EPS of $0.04 in the second quarter of 2012.

While Best Buy reported that its online sales were strong with a comparable same-store sales increase of 10.5% , the primary reason for the increase in income was the company's cost reductions. During the quarter, the company eliminated $65 million in annual cost. All told the company has reduced costs by $390 million since it hired its new CEO Hubert Joly. Mr. Joly was hired in August of 2012 and he immediately cut cost by closing underperforming stores, revamping existing stores and laying off employees.

Best Buy struggled during 2011 and 2012 primarily because of stiff competition from online retailers such as Inc. (NASDAQ:AMZN) and discount retailers like Wal-Mart Stores Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT). However since Hubert Joly has taken over, things seem to be getting better. The company has still seen a loss in revenues partially because it closed underperforming stores, but its profits are up, and so are its margins. The company's second-quarter gross margins increased to 26.5% beating analyst's estimates of 23.3. In addition, the company's net profits were 27.4% up from 24.3% in the previous year.

Hubert Joly commented during the second quarter earnings call, that, "While we are clear there is much more work ahead, we have made measurable progress since we unveiled Renew Blue last year, including near flat comparable-store sales, substantive cost take outs, and better-than-expected earnings in the past three consecutive quarters."

Best Buy's Future

Hubert Joly has instituted a number of new policies in order to make Best Buy more profitable. Perhaps the most noticeable is the new price matching program. The stores have also increased their in store areas for mobile device manufacturers such as Apple Inc. (NASDAQ:AAPL) and Samsung. The company has also invested additional time and money to train its employees. One note, I shop at Best Buy and the employees are extremely product knowledgeable. I have noticed that when they fully explain different products and how they can benefit me, I spend more per visit. Mr. Joly said "Our goal is to be price competitive, it is table stakes," and these initiatives along with the company's push to increase its online business were designed to help the company reach its goals.

The changes that Best Buy has made are part of its Renew Blue initiate. The goal of the Renew Blue initiative is to address the company's cost structure by moving away from the big box business model. The company has done that by eliminating 50 low margin big box stores, remodeling the remaining stores and investing in its online marketing business. The Renew Blue initiative seems to be working, in the second quarter, same-store sales were down 0.6% versus same store sales losses of 6.6% and online sales rose 10.5%. Also during the second quarter, individual store cost were down and the company's net income was the highest that it has been since 2011.

Best Buy's Financial Analysis

Best Buy's finances are in relatively good shape for a struggling retail company. The company ended the quarter with $1.91 billion in cash and $1.68 billion in debt. Its operating cash flow during the quarter was $1.83 billion.


Best Buy is one of the great turnaround stories. Just over a year ago the company was floundering and many people thought that it would go bankrupt like its old nemesis Circuit City. Its then founder and Board Chairman Richard Schulze was in talks to sell the company to private investors. Fortunately once Huber Joly took over things changed for the better. The company closed stores, laid off 400 workers and returned to profitability. Over the last year, the stock price has rebounded by over 200%, from a low of $11.20 on December 20, 2012, to its current price of around $35. The stock performance of Best Buy is the second best (behind Netflix (NASDAQ:NFLX) in the Standard & Poor's 500 this year.

Currently Best Buy's forward price-to-earnings ratio is 13.4, and its price to book ratio is 3.32 and it would be reasonable to think that its stock is not overbought. However I believe that its stock price has advanced too far too fast and I would not buy the stock at its current price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by an Analyst at ResearchCows, ResearchCows is not receiving compensation for it (other than from Seeking Alpha). ResearchCows has no business relationship with any company whose stock is mentioned in this article. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the company's SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

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