Several months ago, I wrote a response to Forbes contributor Larry Downes' blog post "Why Best Buy Is Going Out of Business...Gradually." Since then, Mr. Downes has written several more posts in which he continues to hammer Best Buy (BBY), the most recent being after the release of its fourth quarter and fiscal year results. I will not respond to all these posts, but they are readily available online and should be read. (One point to note: In these articles, Mr. Downes always praises Apple (AAPL) and Amazon (AMZN) at the expense of BBY. Take this criticism with a grain of salt. He is an internet industry analyst and consultant according to his bio, and although he has stated that he is not affiliated with AAPL or AMZN in any way, that doesn't mean he doesn't wish to be or stand to gain in some way).
A Look At The Numbers
Now to those FY 2012 results. On first glance, OUCH!! A GAAP loss of $3.36/share for the year. However, if you delve a little deeper into the numbers, the picture isn't nearly as grim. Adjusted non-GAAP results were $3.64/share for the FY, up 6%. What resulted in the GAAP loss? Costs related to purchasing CPW's stake in Best Buy Mobile (a good thing), restructuring costs (a bad thing) and impairment charges to goodwill relating to Best Buy Europe (a big 'so what?').
Most importantly, none of this matters. What investors should care about is cash flow, and on that front BBY passes with flying colors. Fiscal 2012 FCF was $2.5 billion. This enabled BBY to repurchase 54.6 million shares of stock at an average cost of $27.47/share. The EV/EBITDA multiple is approx 2.9 and the multiple EV/FCF is approx 4. I would be shocked if private equity firms are not taking a look at BBY. That doesn't mean I think a takeover bid is on the horizon, but it is surely something that I could see happening.
A Look At The Business
Can we please stop comparing Best Buy stores to AAPL stores? This is like comparing Hugo Boss stores to Macy's. If Hugo Boss shirts become the hottest items on the planet, does that hurt Macy's, which also sells Hugo Boss shirts? No, it doesn't. Amazon, on the other hand, is a Best Buy competitor. However, the advantages that Amazon has are not exactly rock solid. There is the issue of state sales tax, which AMZN will eventually be forced to charge. Although it may take a while, the tax man will always-- eventually (I emphasize again)-- get his cut.
More importantly, online margins for TVs, computers and appliances are falling as shipping costs continue to increase and prices for these items fall. This will result in an advantage for BBY with in-store pick-ups, especially if shipping costs continue to rise over the long term (which I think they will).
These big ticket items are the bread and butter of BBY. As a result, BBY has been hurt by the lack of demand for these items as consumers are still wary about spending money on a new TV or appliance. A moribund housing market is not helping matters, as many people will splurge on new items when they move into their new home. In addition, besides AAPL products, there hasn't exactly been a great deal of exciting electronics hitting the market. This weak product cycle will certainly not last, and when it turns, Best Buy will be there to capitalize on it.
As far as focus on smaller stores and Best Buy Mobile outlets, we will have to see. The planned doubling of Best Buy Mobile stores by 2016 looks like a good move. The smaller stores? I don't really know but arguments could be made both for and against them.
Bottom Line: I am happy that BBY got hammered these past few days. I increased my position on Friday, March 30th and will continue to do so.