3 Signs BBY Stock is a “Buy”

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Best Buy's ( BBY ) fourth-quarter results breathed new life into the wounded consumer electronics giant.

When BBY reported Q4 and full-year results last week, the market jumped all over the stock, driving shares up by 5%. Earnings per share of $1.24 were well ahead of expectations of $1.01. That was good enough to overshadow the 3% decline in top-line revenue ($14.5 billion versus $14.7 billion expected).

Renewed interest in the stock comes on the heels of a dismal January. Remember that BBY delivered a major disappointment to the market when it announced a year-over-year decline in Q4 same-store sales, including the all-important holiday season. I documented this event, as well as BBY's 35% share price collapse, in a January article .

The big-picture investment thesis with BBY continues to hinge on belief 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.com ( AMZN ).

This view also holds that BBY's revamped ecommerce presence, price competitiveness and better product selection will lift visibility and improve the consumer experience, leading shoppers to open their wallets.

Here are three reasons I think the turnaround story for BBY stock is still intact, that investors should stick with the stock if they already own it, and should consider buying shares now if they don't.

Online Sales Still Growing

One bright spot for BBY was that comparable online sales were up by 26% to $1.57 billion in Q4. Online sales represented 13% of total sales, an increase from 11.5% ($1.32 billion) in Q3. If we step back and look at the full year, online sales growth of 20% in 2013 is a big step in the right direction.

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 website 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.

BBY's online sales were the result of higher conversion rates and higher online traffic, higher dollar value orders and a much-improved inventory management system that is beginning to support ship-from-store as well as distribution center deliveries.  I expect we'll see continued improvement in the year ahead.

Fears of Competitive Pricing Overblown

Remember that BBY highlighted a competitive promotional environment leading into the holiday. We wanted to see the company compete on price because that's part of the turnaround strategy.

In Q4, BBY's operating income declined by 1.2%. That's not great. But 1% of this decline was forecasted and discussed on the Q3 call as management outlined costs due to mobile phone warranty and new credit card agreements.

While these costs certainly affected profitability, it's important to realize the impact of the holiday season "price wars" was not the full 1.2% hit to operating income. It was much closer to 0.2%

Operating Profits Are Starting To Turn Around

A quick check on full-year operating profits shows that 2013 was a year of vast improvement over 2012 as BBY delivered operating income of $1.14 billion.

best buy stock

BBY 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. That's a 38% increase over his original goal.

As I've said before, the company can't cut its way to growth. But it can cut its way to profitability, and 2013 results show that's the track it's on.

BBY Stock: The Bottom Line

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 U.S. had a tough year, declining by 3%, according to data from NPD Group (doesn't include appliances, mobile phones and gaming devices).

The $1 billion in annualized cost savings should help operating profit continue to grow. Sales growth would drive incremental profits, too. Improvements to the online marketplace and supply chain should provide customers with a better online shopping experience.

And of course, the improved in-store shopping experience, featuring stores from Microsoft (600 opened in Q4) and Samsung (1,400 opened in Q4) should help draw customers into BBY's brick-and-mortar locations. As BBY rolls into 2014 with these improvements largely in place, their focus will be on getting customers to open their wallets.

Is the turnaround for BBY stock a sure thing? No, of course not. But based on 2013 results, it still appears to me to be intact, despite the rough comparable holiday sales and the subsequent stock crash. Whether or not I'm right will depend on BBY's ability to execute in 2014. Most investors, including yours truly, see the next 12 months as a make-or-break period for the company.

At the current share price around $25.50, investors should decide now if they believe BBY stock 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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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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