Best Buy's (
) fourth-quarter results breathed new life into the wounded
consumer electronics giant.
When BBY reported Q4 and full-year results last week, the
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,
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
), Target (
and Amazon.com (
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
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
Fears of Competitive Pricing Overblown
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.
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
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
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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