This Behemoth Is Down, But Not Out

Running a 24-hour live chat for charity was a challenge of my endurance as well as my mind. Plenty of great companies were brought up in our discussion, especially a few that had somehow fallen off my radar.

I figured I'd spend some time discussing the reasons why one in particular, though down-trodden at present, could be in for a sizable rebound in the years to come.

Best Buy (NYSE: BBY  ) has been a roller-coaster ride over the past four years, netting buy-and-hold investors a 26% dividend-adjusted loss over that time span and giving them countless headaches. But don't reach for that Tylenol just yet because there are plenty of reasons to be bullish on Best Buy's long-term outlook.

Lack of competition
With the demise of Circuit City, Best Buy was expected to step in and dominate the consumer electronics space. We haven't seen this just yet: A soft consumer and weakened television sales negatively affected earnings in its most recent quarter. Despite this, Best Buy has a long track record of overcoming economic downturns as a stronger company, and it just might be increased online sales and phone sales that drag it out of the doldrums.

Competing against Best Buy in the consumer electronics space is a collection of less than exciting choices: RadioShack (NYSE: RSH  ) and hhgregg (NYSE: HGG  ) .

RadioShack has been unable to differentiate itself as a second-market player for the better part of a decade. Consumers continue to flock to Best Buy for higher-end products and to RadioShack for smaller, lower-margin products.

Hhgregg, on the other hand, has a faster growth rate than Best Buy, but being so much smaller, it lacks the advertising budget to compete with Best Buy on a national level. It also has missed earnings expectations in two of its past three quarters, so growth aside it has a lot left to prove to investors about its consistency.

Fiscal responsibility
Best Buy is already an electronics behemoth, but it still understands how to take care of shareholders and maintain a conservative balance sheet.

It all starts with shareholders, who have been rewarded by a 100% increase in quarterly dividend rates over the past five years. Best Buy's yearly dividend now sits at a tempting 1.7% yield and is funded by the mountainous cash flow generated from maintaining a 25% gross margin, even in tough times.

These margins are supported through a combination of cost-cutting and maintaining proper inventory levels. Best Buy has one of the quickest inventory turnovers in retail, which allows its cash to be always working rather than tied up by merchandise sitting in a warehouse.

Foolish takeaway
Best Buy should be a long-term winner if it can maintain its margins and keep its rivals in its shadows. By continuing to grow its online business and controlling expenses, I suspect you'll see rising dividend payments and a higher stock price down the road.

More electronic Foolishness:

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. He has been known to treat Best Buy stores like his own personal playground. You can follow him on CAPS under the screen name TMFUltraLong. Best Buy and hhgregg are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended buying calls on Best Buy. The Fool owns shares of Best Buy and it is also a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (3)

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  • Report this Comment On January 04, 2011, at 2:27 PM, foolishsite wrote:

    I have read article after article from this site on RadioShack and i am just curious. Does this site have a biased against RadioShack?

    I can't remeber a time there has been a positive article in favor of RadioShack.

    Lower Margins? The profit margin of RS is 5% where BBY has a 2.78%. This comparison is just about as good as comparing 7-eleven to Harris Teeter and asking why consumers go there instead for there grocery needs.

  • Report this Comment On January 05, 2011, at 10:41 AM, pepijndk wrote:

    Dear Fools,

    it is well known that retail is all about economies of scale: the biggest has the most scale advantages, leading to lower unit costs, enabling them to be the most profitable whereas at the same time being able to offer the lowest prices to consumers - something the competition is simply unable to do as it lacks the same scale advantages. The competition is then faced by the eternal chicken-and-egg conundrum: can't compete on pricing unless you're the biggest, but will never become the biggest unless you can compete on pricing...

    This is especially true in the groceries chain business as here volumes are huge (people shop for groceries almost daily). Wal-Mart being the prime example of someone you can't compete with as they've become too big.

    Now my question: it would be interesting to get some feedback from you on how this works out for electronics retailers. Here volumes are much lower - people don't shop for electonics daily and some items simply are low volume: a 200$ cell phone barely takes up any volume.

    Can you shed some light on how much BBY is advantaged over its competitors by having larger economies of scale (i.e. their trucks have to drive less far on average to supply stores and all that)?

    There must be some advantage, but my question is: is the advantage substantial enough to put BBY apart from competition indefinatly such as WMT did years ago in the groceries chain business?

    Many thanks for your view on this.

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