Finally time to buy Best Buy?
The world's largest consumer electronics chain will post earnings Tuesday.
Management at retail giant Best Buy (BBY) was likely relieved that the horrible earnings announcement from JC Penney (JPC) last week grabbed the spotlight for a while. Best Buy's back-to-back oustings of CEOs and an earnings report that stressed the rocky road ahead have done nothing good for the stock or the company's image.
Beaten down after five consecutive quarters of shrinking margins and managerial turmoil, Best Buy's stock chart looks like a staircase to bankruptcy. But, excluding the one-time charge for liquidating operations in the U.K., the company had a pretty good first quarter operationally. The stock is trading at a multiple of around 4 with a 3.5% dividend yield. I believe the market will give the company one more chance based on the strength of the brand alone.
Bricks and anchors
Traditional bricks-and-mortar businesses are taking a beating from the Internet. Amazon (AMZN) is making an ever-wider array of purchases easier and cheaper from your home or mobile device. The company is focused on driving people into its ecosystem and the backbone of that strategy is the Kindle Fire. The Fire is such a symbol of Amazon's war on bricks-and-mortar retail that Target (TGT) recently announced it would no longer sell the devices.
Many consumers find there is little or no reason now to go into a store like Best Buy, other than to check out an item in person. Perhaps Target's next step will be to prevent shoppers from pulling out their Fire's and cross-shopping at Amazon while in their stores.
So, places like Best Buy have become cathedrals for consumers to "ooh" and "ahh" over the things plan to buy online and have shipped without paying shipping or tax. The cost of maintaining all the infrastructure is simply overwhelming, even if you are the biggest player and have a pricing advantage. Wal-Mart (WMT) is finding this out as Amazon routinely beats it on price by as much as 10%. Best Buy has closed the gap from 10% to 5% on average, but it's doing so at the expense of net margins. (Not that Amazon's margins are anything to write home about.) The stores themselves have become anchors weighing down the business and burning up profits.
Growth through acquisition
Best Buy's joint venture with Chinese electronics retailer Five Star in 2006 was the beginning of a trend I expect will continue with other retailers. Companies will grow by acquiring or partnering with others. This will help to extend brands into new markets and, hopefully, diversify revenue models.
Having pulled out of Europe, Best Buy is trying again in China, but with a different model. It's expanding the Five Star store network while opening up Best Buys as a store-within-a-store, likely built around the Best Buy Mobile stores being launched in the U.S. The Best Buy Mobile stores will have smaller footprints, focus on mobile devices and be completely connected. Best Buy wants to push the added services envisaged when it bought mindSHIFT, building on the Geek Squad but with a focus on small-to-medium-sized business services.
Given the fragility of the macro environment right now, I'm not advocating making a trade here. However, I would note that BBY is currently priced at a market cap of $6.3 billion, equal to inventory + cash. At these levels Best Buy might be the best "buy" in U.S. retail.
Peter Pham runs AlphaVN.com, a research and trading site in Ho Chi Minh City, Vietnam, that focuses on emerging Asian markets.
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