Seeking Alpha
Long/short equity, growth, growth at reasonable price, momentum
Profile| Send Message| ()  

Shares of Best Buy Co., Inc (BBY) were trading lower following the company's third quarter report which was released after the market closed on Nov. 18. The sell-off continued in to the next day when shares dipped more than 10% as investors digested management's warnings that it is operating in a difficult environment and will have to increase promotional activity to stay competitive during the holiday shopping season.

With shares trading off of its 52-week highs of $44.66, I feel it is a great opportunity for shareholders to jump in for the long term.

Investors should ignore short term hiccup and buy shares for the long term. The company's turnaround is still in full force and has not yet realized the benefits of its newly implemented strategies.

2014 and beyond: All for sale at Best Buy

Samsung (GM:SSNLF)is reported to be preparing displays with 560ppi for its upcoming refreshed Samsung Galaxy S line.

BGR reported that Apple's (AAPL) iPhone 6 is set to be released in 2014 in two versions, a 4.7-inch and 5.7-inch screen with a potential 1080p display. Apple's recently acquired PrimeSense, an Israeli-based company that created technology that detects hand gestures. This new innovative feature could also be factored in to a future iPhone.

Bloomberg speculated that the iPhone 6 will feature displays covered by glass that "curves downward at the edges." The phone will be released in the second half of 2014.

Why this important for Best Buy
The company recently remodeled its stores by reallocating space away from categories that aren't as high margin (such as packaged media) toward products that are in high demand. Both Samsung and Apple already maintain "stores within a store" at Best Buy locations.

Hubert Joly, the company's CEO best summed up the objectives of Best Buy's "stores within a store" strategy during its third quarter conference call:

So in the same store, you're going to be able to touch and feel an Apple product, a Samsung product, a Windows product. So that's also very meaningful, and it's helpful to our journey

Between the upcoming refreshes of the two biggest smartphone manufacturers, the product cycle looks more cooperative than it has been in years at Best Buy. Overall consumer demand for new devices remains strong going into 2014 and will be supportive of Best Buy's long-term growth.

Longer term, Best Buy could gain from the increasing adoption of smart watches and other wearable technology like Google (GOOG) Glass. According to Credit Suisse, the smartphone watch market will be valued at $50 billion by 2017. While many investors aren't fully convinced that these products will become mainstream, it could nevertheless make an incremental contribution for the company down the road.

Setting up to be the leader in online business

Best Buy has done an effective job at growing its online presence as its e-commerce business generates around $2 billion in sales. This number will continue to grow as Best Buy continues to roll out its "buy online, ship from store" and "buy online, pick up in store" initiatives.

According to UBS one out of every 100 visitors on the company's online site makes a purchase. Management has ambitious plans to bring its website up to par with its competitors who have a roughly double conversion rate. The company is aiming to more than double its current market share of U.S. online electronics sales to 18%.

"There is no reason it should be lower," according to Joly. He also states that the company's transformation to a higher market share "is going to be a two- or three-year journey."

Investors are still opening up to the idea that it can compete with Amazon.com (AMZN). The company's "buy online, pick up in store" option is convenient for consumers who require small purchases that do not add up to cover Amazon.com's recently raised minimum purchase of $35 to qualify for free shipping.

The Wall Street Journal published an article which described Best Buy as a company that can "beat" Amazon.com because of its numerous online initiatives which gives the retailer an advantage over the e-tailer. Such initiatives include Best Buy's price matching policy which Joly emphasized its importance during the company's third quarter conference call:

The Low Price Guarantee, which is our price matching policy, which includes online, is a nice tool for the Blue Shirts to close the sale. From a frequency and cost standpoint, it's a relatively minor driver, but it's an effective tool to give the comfort to the customers that they're getting the right price.

Loyalty program could be modeled after leaders

During the company's conference call, management revealed they have reinvented the Reward Zone loyalty program and are replacing it with an enhanced program branded My Best Buy.

GameStop Corp (GME) offers one of the best loyalty programs in all of retail, and it can provide a benchmark for success at Best Buy. GameStop's PowerUp Rewards loyalty program was launched in 2010 and has grown its total U.S. membership from 8 million at the end of the fourth quarter 2010 to 25 million at the end of the second quarter 2013. PowerUp Rewards members accounted for 70% of total U.S. purchases for the company in fiscal 2012.

GameStop's loyalty program is particularly valuable for heavy spenders, and these clients are critical to GameStop's competitive advantage. The company offers two membership tiers: "Basic," and a "Pro" membership that costs $15 a year. Management has noted that Pro rewards membership renewal rates are above 50%.

Best Buy operates a similar trade-in program for cell phones, tablets, iPods, MP3 players, laptops, and gaming consoles. The company is taking a page out of GameStop's business model and can use its significant scale and resources to achieve success in the rapidly growing "re-commerce" domain.

Balance sheet

Sharon McCollam, the company's Chief Financial Officer, hinted that management will discuss its plans for excess cash after the holiday season. The company suspended its share repurchase program in August 2012 and still has $4 billion in availability under a $5 billion authorization.

GameStop, by comparison, has returned free cash flow to investors by buying back 29% of shares since the fourth quarter 2009. Its management has indicated that the company will continue doing so.

Investors shouldn't be surprised if Best Buy resumes its share repurchases to offer investors a similar shareholder friendly approach as GameStop does.

Conclusion

Best Buy and investors have been on a wild ride over the past year. This has included a new management team, increasing connectivity with vendors, and investments in its online business.

Over the past year, the consensus forward EPS forecast has hovered between $2.00 and $2.50. The next phase of the company's stock appreciation will likely come from estimates moving higher as the investors and analysts continue to appreciate the benefits already realized and those that are still playing out.

Source: Best Buy Is A Great Buy For Your Long-Term Portfolio