Best Buy: Is Renewed Blue Back For Good?

Before Amazon.com Inc (NASDAQ: AMZN) gate-crashed the retail party, Best Buy Co Inc (NYSE: BBY) was the place where most people went to shop for tech gadgets and home appliances. The meteoric rise of Amazon has changed the rules of the game. Traditional retailers have been whipping themselves into shape to compete with the e-commerce behemoth. Some have fallen by the wayside. Others keep soldiering on. Best Buy is among the survivors and seems to have got its confidence back. So much so, it announced this month it was boosting its quarterly dividend by 21% to $0.34 per share with immediate effect. With the yield now at just over 3%, Best Buy may look like an attractive…well, buy. Shall we see if that’s the case?

Best Buy fact sheet

Best Buy
Best Buy

The company opened for business in 1966 as an audio specialty store under the name Sound of Music. Its founder was 25-year-old Richard Schulze, who served as CEO until 2002 and as chairman until 2012.

Headquartered in Richfield, Minnesota, Best Buy has narrowed its product focus over the years to consumer electronics and home appliances. It currently has over 1,500 stores across the US, Canada and Mexico and more than 125,000 employees. Its products are also available online.

As of this point, Best Buy has a market capitalization of about $13.7 billion.

The turning point

In 2012, many doubted that Best Buy would make it through. A string of brick-and-mortar retailers had fallen victim to the e-commerce blitz. However, Best Buy devised a turnaround program called Renew Blue and launched it in November 2012. It is almost universally accepted that the measures implemented through this program have allowed Best Buy to survive the Amazon typhoon and get in shape for the new retail race.

Best Buy overhauled its pricing policy through a price match program, minimizing the impact of consumers’ pesky showrooming habit. The company also tightened the belt. It implemented a series of measures aimed at delivering annual savings of $400 million by 2018. As of this moment, Best Buy has delivered about half of these savings.

As for its locations, Best Buy made a strong bet on the store-within-a-store concept, picking as partners the likes of Apple, Samsung, Microsoft and Sony. It also brought into the spotlight its Geek Squad service, which has helped the company differentiate itself from the competition.

Arguably, Best Buy’s wisest move was the energy and resources it dedicated to its online operations. There’s no getting around it: consumers love shopping online and traditional retailers have to take this into consideration if they want to remain relevant. Best Buy’s efforts on that front are paying off. In the most recent quarter, online sales accounted for 18.6% of total US revenues versus 15.6% a year earlier. For all of fiscal 2017, which ended on January 28, 2017, online sales jumped by 20.8%.

The Q4’17 results

The report came out on March 1, along with the statement announcing the dividend increase. Strictly speaking, Best Buy’s fourth-quarter results weren’t that good. Moreover, the company delivered a downbeat 2018 guidance, which promptly dragged its shares down by almost 5% on the day of the announcement.

But while quarterly revenues fell short of expectations, Best Buy managed to deliver an earnings beat thanks to a tight rein on costs. On a GAAP basis, diluted earnings per share from continuing operations jumped by 37% year-on-year, while the non-GAAP figure was 27% higher at $1.95.

So why did the market punish Best Buy in the wake of the report? First of all, fourth-quarter revenues slipped to $13.48 billion from $13.62 billion a year earlier. Moreover, same-store sales were down by about 1%. Investors were obviously rattled by the fact that this decline occurred in the holiday quarter, when retailers typically deliver their best results.

According to chairman and CEO Hubert Joly, the lackluster revenue figures were partly due to problems with product availability. Reuters cited Joly as telling analysts that supply issues with some products may have depressed quarterly revenues by about $200 million. Roughly the same amount could have been lost due to the recall of the Samsung Galaxy Note 7 smartphone. Joly also noted that demand for gaming products had proved weaker than expected.

On a more positive note, Best Buy’s chief said the Renew Blue program had helped the company improve “dramatically” its operating performance. Joly declared that the program can be considered officially over. The next phase of development will proceed under a strategic plan called Best Buy 2020: Building the New Blue.

What now?

Best Buy is nothing if not resilient. It has become the poster child for retail survival in the age of e-commerce. The company has obviously turned the corner but it remains to be seen whether the improvement will continue. Best Buy is making all the right moves and is likely to grab extra business. That’s because rivals RadioShack and hhgregg are headed for the exit. Still, the saturated market for its key products, the competition from online retailers and the slow economic growth will keep throwing challenges before the company. Analysts have said Best Buy may have a tough 2018 as it runs out of cost-cutting options and fewer exciting electronic gadgets seem set to hit the market. They also note that the company has counted on share repurchases to boost earnings growth.

Speaking of repurchases, Best Buy said in its quarterly report that the board had authorized a new $3 billion share buyback plan. The company expects to complete it within the next two years. The same statement also said that Best Buy was targeting a payout ratio of between 35% and 45%.

Valuation

As some analysts have noted, Best Buy may be the cheapest retail stock around at the moment. The shares are changing hands at only about 9% below the 52-week high of $49.40. However,  the trailing and forward P/E ratios stand at 13.8 and 11.2, respectively, according to Morningstar. In comparison, the trailing average figure for the industry is 37.9. Best Buy also has a P/B ratio of 3.2 against 8.3 on average for the industry. The respective P/S ratios are 0.4 and 2.1. Moreover, GuruFocus has an EV/EBITDA multiple of 4.35 for Best Buy versus an industry median of 11.62.

The market also appears to have a good deal of confidence in Best Buy. The stock was trading at about $40 at the close of 2009. In the post-recession years, it slumped to a mere $11. It is now back above $44, recouping the losses suffered after the quarterly report.

In other words, this would be a good time to stock up on some Best Buy. The main thing investors need to decide is whether they see traditional retail as a resilient old slugger or a weary veteran ready to pack it in. Because no valuation would be attractive enough for investors who have written off brick-and-mortar retailers.

Disclosure:

I do not have a financial interest in any of the companies featured in this article, nor do I plan on having one within the next three days.

This article reflects my opinions. The company is not paying me to write it and I do not have any business relationship with any companies mentioned in it.

 

One thought on “Best Buy: Is Renewed Blue Back For Good?

Leave a Reply