3 Reasons Best Buy (BBY) Is Not a Bust

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bby-best-buy I've been advising investors buy shares of Best Buy ( BBY ) for several months now. But last week's 30% plummet in Best Buy's stock served as a wakeup call that this story isn't a slam dunk.

The reason for Best Buy's decline was that nine week holiday sales were not good; same-store revenue declined by 0.9% year-over-year. That was very disappointing considering we were expecting at least 2% growth.

The big picture investment thesis is that there is room in the market for a big box type brick-and-mortar consumer electronics store. One that offers an alternative to Wal-Mart ( WMT ), Target ( TGT ) and Amazon ( AMZN ).

A management led turnaround - focused on improving online and mobile sales channels, customer experience, corporate efficiency, product selection and competitive pricing - is also a major consideration.

Holiday sales were not great, there's no denying that. But I don't believe nine weeks of the year tells the whole story. Here are a few reasons investors shouldn't get too worked up about BBY's weak holiday sales and the subsequent stock crash (full disclosure: I own BBY, and plan to buy more).

The Entire Holiday Sales Picture Is Still Unknown

BBY highlighted a competitive promotional environment leading into the holiday. I approved of this, even though it would hurt margins. The fact is that BBY has to compete on price because that's part of their turnaround strategy. I don't like to see companies set a course, then change it - I want to see follow through.

BBY followed through this holiday season but despite their competitiveness didn't grow sales. That suggests that they had difficulty attracting consumers away from the competition, namely Target ( TGT ), Wal-Mart ( WMT ) and Amazon ( AMZN ).

But, to be fair, we haven't heard holiday sales numbers from these companies yet. So we can't make an apples-to-apples comparison.

It may turn out that retail sales were down across the board. Perhaps a shorter holiday shopping season did matter. And perhaps weather was a factor. But all big retailers faced the same environment. Right now the market believes that when the chips were on the table, BBY played, but didn't win.

That's a definite possibility. But it's also very likely that BBY played, but didn't lose. That's an important distinction, especially for a company that we shouldn't expect to be a clear winner at this early stage of the turnaround. Just being in the mix is perfectly fine at this point.

Critical Online Sales Improve, But a Lot of Room Left

One bright spot for BBY was that comparable online sales were up by 23.5% to $1.32 billion. Given the importance of online (how can you compete with AMZN without an online presence?) this metric jumps off the page for me. Online sales were 11.5% of total sales.

Despite this bright spot, BBY needs to step up its online effort in a big way. And do it right now. The vast majority of customers begin their shopping experience online, and around half actually shop the internet while in a store. These customers should not be allowed to leave without buying something that BBY has in stock, especially when BBY has it at a competitive price.

The challenge is making sure the customers know this. And that means offering great online and mobile shopping experiences. While online sales showed an improvement, the bottom line is that management needs to make online and mobile a bigger priority, right now.

Cost Cutting Initiative Making Progress

A company can't slash its way to growth. But running an efficient business is part of the overall success package. BBY recently slashed another $45 million in annualized costs which brings its total annualized Renew Blue cost reduction to $550 million. The company has to get leaner before it can grow again.

Service Levels: Improvement

BBY stated that its Net Promoter Score improved by 4%. Given that retail is a service battle, an improvement here suggests that BBY has some fire left. BBY has high market share in a lot of consumer electronics categories. This means that many customers are theirs to lose.

The Bottom Line

Holiday sales were not good. But I still believe there is room for a bricks-and-mortar consumer electronics store, especially as devices become more interconnected and consumers desire to see, feel and discuss (in person) various product attributes.

I see no reason why BBY can't fill that slot and compete with TGT, WMT, AMZN and COST, especially given that it's partnerships with vendors (Apple, Google, Microsoft, etc.) differentiate the shopping experience.

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. My advice is that if you don't yet own any BBY, now is a good time to start buying. Just be prepared to hold for years, not months, to earn your reward.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: BBY , WMT , TGT , AMZN

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