The Buzz

All markets and investing news all the time

Why is Best Buy up 60% this year?

March 7, 2013: 10:50 AM ET
The future of retail? Or the past? Investors are suddenly bullish on the chances of a Best Buy comeback.

The future of retail? Or the past? Investors are suddenly bullish on the chances of a Best Buy comeback.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Best Buy is expected to report a nearly 20% decrease in earnings per share this fiscal year. Sales should drop too. And a takeover by the company's founder now appears to be off the table.

Yet shares of Best Buy (BBY) are up 60% so far in 2013. It's the second-best performer in the S&P 500, trailing only Netflix (NFLX).

Why is a company that some feared could be the next Circuit City or Borders now being treated like it's the next Amazon (AMZN) or Apple (AAPL)?

A couple of factors are at play. Even though nobody can say with a straight face Best Buy is doing well, there are signs of improvement.

Last week, Best Buy reported same-store sales in the U.S. were up in the fourth quarter. Granted, they only rose 0.9%. You'd think a company selling gadgets should do better during the holidays, but the fact that sales were up at all is huge progress. A year earlier, sales fell 1.1%.

Related: Most at risk from Amazon? Bed Bath & Beyond

Brian Sozzi, chief equities analyst at NBG Productions, thinks new CEO Hubert Joly -- who took over last August -- may have bought himself more time to convince investors his turnaround strategy will work.

"I don't think Best Buy had to hit a home run to entice would-be shareholders and prevent what's left of the base from dropping a peace out sign.  All that had to be shown was that the new team, which many on the Street lacked trust in, could drive the company toward the light and not into the retail dustbin alongside Circuit City," Sozzi wrote in a report last week.

Under Joly, Best Buy has announced plans to close stores to help boost profits.

Best Buy recently made a price-matching initiative, originally put in place just for the holidays, a permanent program. That could help Best Buy compete more effectively against Amazon.  Many critics argued the company had been a victim of what's known in the retail industry as "showrooming." Consumers would go to Best Buy to see a product but then order it online at a cheaper price.

Related: Best Buy ends work from home program

Best Buy also made waves earlier this week by following the controversial lead of Yahoo (YHOO), which killed off employee telecommuting last week. Best Buy's move wasn't as drastic. It is merely making it tougher for company employees who do not work in actual stores to set flexible schedules. Those workers now have to get manager approval.

But the message this sent was undeniable. Best Buy realizes it is in trouble. In an e-mailed statement, Best Buy spokesman Matt Furman said that "it's 'all hands on deck' at Best Buy."

Still, what about that botched takeover? Best Buy founder Richard Schulze had hoped to purchase the company. But a deadline for him to make a final offer came and went last week with no deal. Strangely enough, that too is viewed as a good sign. With talk of a leveraged buyout no longer serving as a distraction, Joly can concentrate all his efforts on getting the retailer back on track.

Related: Best Buy buyout push ends

Schulze still owns 21% of the company's shares though. So he could sink the stock by unloading his stake. But Anthony Chukumba, an analyst with BB& T Capital Markets, said that wouldn't have a long-term effect on the stock. He said investors would view it more like Schulze "taking his toys and going home."

But hasn't the easy money been made in the stock? Can Best Buy really save itself from the fate of other specialty retailers? It may be difficult.

Best Buy is not alone in struggling against Amazon and discount king Wal-Mart (WMT). So are Staples (SPLS) and Barnes and Noble (BKS).

Making matters worse is the fact that there aren't too many must-have tech gadgets on the market.

Related: The laptop/tablet hybrid will never work

If you want an HDTV, you probably already own one. Anyone buying PCs? As for smartphones and tablets, there's been little in the way of innovation lately. It's one black (or occasionally white) rectangle after another. (I'm personally waiting for a rhombus-shaped smartphone.)

So if Best Buy is going to show continued improvement, it's likely to be due to more cost cutting ...  not a huge rebound in sales.

"BBY can't do anything about the secular downturn in consumer electronics but it can improve its returns," wrote Carol Levenson, an analyst with fixed-income research firm Gimme Credit, in a report this week.

But retail turnarounds take time and investors can be unforgiving. Just look at J.C. Penney (JCP) since Ron Johnson left Apple to lead the still-struggling department store chain. The stock popped in Johnson's first few months as CEO, but it's been all downhill since.

That isn't to say that Best Buy is primed to plunge. The stock, even after this year's big run, is only trading at about 9 times earnings estimates for this fiscal year. So it's not expensive. Chukumba thinks that there is much more upside, even going so far to call it a "no-brainer buy."

"This is just the beginning. The stock has much more room to run. I'm very impressed with the new senior management," he said.

Chukumba noted that Sharon McCollam, who was hired late last year to be Best Buy's chief financial officer and chief administrative officer, was largely responsible for helping Williams-Sonoma (WSM) implement a successful digital strategy in her 12 years at that company.

Yes, the worst may be over. But don't be surprised if the next few months aren't as smooth as the past two for Best Buy.

Posted in: , ,
Join the Conversation
Fear & Greed
Sponsored by
About This Author
Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

To view my watchlist

Not a member yet?

Sign up now for a free account
Stupid Stock Move of the Day
#StupidStock Move of the Day! Yes, Urban Outfitters may be finally turnings things around. But $URBN up 17%? Seems a bit excessive, no?
Most Popular
Powered by VIP.