Best Buy: ‘Best Days Ahead’

12/15/2014 7:00 am EST


Tyler Laundon

Editor, Cabot Small-Cap Confidential

I've held the shares of this leading consumer electronic retailer since 2013 and it's been a wild ride, explains Tyler Laundon in Daily Wealth.

A year ago, the market punished Best Buy (BBY) for not having a breakout holiday sales period. The hammer fell last January and the stock was pounded down from nearly $45 to $23 before the selling abated.

Despite the harsh fall, I've maintained my conviction in Best Buy's turnaround story. As I stated last January, shareholders should be prepared to hold this stock for years-not months-to earn their reward.

The company's turnaround strategy stresses operational improvements over growth. Such things as a new Web site, more refined supply-chain strategy (which includes returns), and store-in-store layouts are aimed at making Best Buy competitive in today's consumer electronics market.

Best Buy reported better-than-expected same-store-sales in Q3, an indication that this turnaround story is indeed working.

These results are just one indication that Best Buy's turnaround is indeed on track. The 2.2% improvement in same-store sales was the fastest quarterly growth since early 2010.

Even better, profit more than doubled to $107 million as revenue hit $9.38 billion. Earnings per diluted share rose 80% to $0.32. That result was $0.07 ahead of consensus.

In Best Buy's ever-important online channel, sales were up by 22%. At just 7.5% of total US sales, the online channel isn't the main ticket here. But it's certainly a critical one given the competition.
Many investors and analysts thought Best Buy's days were numbered and that the company would follow Circuit City into liquidation. I don't think so.

I continue to think Best Buy's best days lay ahead. In five years, this won't look like the same company that limped into 2012 with Amazon beating it on the back.

I believe Best Buy is still relevant; the brick and mortar retailer has one dimension that online-only competitors can't emulate.showrooms.

The reasons to window shop Best Buy then purchase online are gone. The pricing is the same. The product is there. Just put it in the car and go home. Why wait?

There is a final reason for investors to consider Best Buy right now. Cash. The company is sitting on $1.42 billion in net cash. That's enough to give management the green light to buy back shares or increase the dividend.

With a current yield of 2.2%, the stock is already paying a decent amount. Any decrease in share count through buybacks-or an increase to the dividend-will be well received by investors.

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