Best Buy: On the Right Track?

03/27/2014 8:00 am EST

Focus: STOCKS

Tyler Laundon

Editor, Cabot Small-Cap Confidential

The big picture investment thesis for this recommendation hinges on our belief that there is room in the market for a big box type brick-and-mortar consumer electronics store, says Tyler Laundon, editor of 100% Letter.

Best Buy (BBY) is the world's largest electronics chain. It's trying to compete on price, among other attributes. And its turnaround comes at a time when consumer electronics in the US had a tough year. But I think management is on the right track and is well positioned to grow the business over the coming year.

The company has cut more costs than expected. Its Renew Blue program called for $725 million in cuts. But, as of the end of the fiscal year, BBY delivered cuts of $765 million. Now, CEO Hubert Joly sees $1 billion as the next target.

Another bright spot was that comparable online sales were up by 25.8% to $1.57 billion in Q4. If we step back and look at the full year, online sales growth of 19.8% in 2013 is a big step in the right direction. And this comes on top of 11.4% online sales growth in 2012, with a really bad Web site.

While BBY's online sales are still well behind those of many competitors, it's important to realize the company has achieved this growth despite a still-antiquated Web site and fulfillment strategy.

Late in 2013, many improvements were in place, but rolling out an integrated online and in-store sales strategy isn't an overnight project and I expect we'll see continued improvement in the year ahead.

Is BBY's turnaround a sure thing? No, of course not. But it still appears to me to be intact, despite the rough comparable holiday sales and the subsequent stock crash.

Yes, the company has a lot of room to improve, both in store and online. But that's why this is a turnaround story, and not a growth story. The turnaround isn't yet complete. I see the next 12 months as a make-or-break period for the company.

As BBY rolls into 2014 with these improvements largely in place, their focus will be on getting customers to open their wallets.

At the current share price, investors should decide now if they believe BBY will be successful over the coming one-to-three years. I do, and I've opened my wallet and added more shares to my personal account. My advice is that you do the same.

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