'98 Year In Review
December 17, 1998
Winner #2 -- Best Buy
by Paul Larson (TMF Parlay)
Up 188.1% as of 12/15/98
Best Buy (NYSE: BBY) lived up to its name in 1998 as it truly turned out to be one of the best buys of the past twelve months. After starting the year at $18 7/16 per share, the stock flew just short of $60 per share in early December. While it's down a bit from its high as of this writing, one can clearly see from the chart of the past year that Best Buy has had an outstanding 1998. Turn the clock back another year or so to February 1997 and the recovery looks that much more impressive. Early 1997 saw the stock trade below $4 per share, just before it rose 15-fold to its high a mere 22 months later.
A 15-bagger? For a retail stock? And an established one at that? Your eyes aren't fooling you, Fool. The story of Best Buy's rise is more a tale about how the company returned from the dead than a story about Best Buy taking over the world. The market often overreacts to bad news, and Best Buy represents an excellent example.
The bad news came in late 1996 when the company was left holding a large inventory of older computer systems and was forced to sell them below cost. The inventory glut caused the company to take an extraordinary loss of $15 million as well as to plead with vendors for increased time to pay its bills. Needless to say, this spooked more than a few investors. In the eyes of Wall Street, Best Buy went from being category killer to road kill. Probably also weighing heavily on the minds of investors were the names of electronics firms that have bit the dust such as Fretters, Lechmere, Nobody Beats the Wiz, and Highland. Operating in a sector with notoriously thin margins (a 2% net margin is considered "good"), the fear surrounding the company was extremely thick.
Down but not out, Best Buy went forward after rethinking some of its strategies. The company scaled expansion plans down to a rate more reasonable to its balance sheet. More important, it tweaked the inventory mix and started selling a more diverse product line by adding such things as books and appliances and decreasing inventories of short-lifecycle products such as computers.
It did not take long for the operational efficiencies to show up on the income statement. The company went from earning $0.02 per share in fiscal 1997 to posting profits of $1.04 per share in the fiscal year ended this past February. Carrying through on its momentum, the earnings results for the first two fiscal quarters of this year also show signs of extreme strength. The company has now reported six straight quarters in which earnings were better than the prior year. The most recently reported quarterly profits exemplify the types of comparisons that have Wall Street quite excited about the stock these days:
($ millions) 1998 1997 Change Revenue $2182.1 $1793.1 +21.7% Gross Profit 429.0 307.1 +39.7% EBITDA 91.4 38.0 +139.9% Net Income 44.0 6.6 +568.2% EPS $0.42 $0.07 +500.0%
Notice not only the swell in the top line, but that the comparisons grow increasingly positive as one reads down the income statement. This indicates that Best Buy's margins are improving across the board -- a good thing indeed. Furthermore, the top line growth is not solely due to the company opening new stores. So far this fiscal year, same-store sales are up an impressive 14.9%. A company with a growing base of operations and strong same-store sales, mixed in with rising margins, makes for an explosive combination when it comes to profits.
The brighter profits also show little sign of cloudy times ahead. When announcing the preliminary sales figures for the company's fiscal third quarter, Best Buy said that same-store sales in the quarter were up 12.9% versus last year. Of more interest, in the same release, "Earnings for the third quarter are expected to exceed current First Call analyst estimates of 47 cents per diluted share compared to 29 cents per diluted share last year."
The company also did its part to clean up its balance sheet a tad when, earlier in the year, Best Buy redeemed its preferred stock. The redemption did add 10.2 million shares to the company for an approximately 10.8% dilution of shares outstanding, but Best Buy received net proceeds of roughly $220 million and will reduce interest expenses by roughly $15 million a year.
Armed with this cash and an increasingly healthy core business, the company stepped up its expansion plans, opening 28 new stores in the past year including 23 in the last three months alone. The most recent additions are in new markets such as New England. The total store count is now 312 units with more additions planned in the coming year. Best Buy is now the largest-volume electronics retailer in the nation.
All this history is certainly interesting, but where does this leave Best Buy heading into 1999? The old cliche, "What doesn't kill you makes you stronger" certainly seems to apply. The company is as strong as it has ever been after learning from its mistakes. Expected to earn $2.33 per share in fiscal 2000, Best Buy now trades at over 20 times forward earnings and 6 times book value -- no longer a bargain. Best Buy may not be the "best" buy it once was, but it still may be a "good" buy if the company can continue its robust profit growth.
Best Buy Company Information:
Trades on NYSE under symbol BBY
Best Buy's Web Site (www.bestbuy.com)
Best Buy's Chart
Other Related Best Buy Links:
Best Buy Message Board
Best Buy? It Has Been -- Fool Plate Special 4/2/98
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