Why Best Buy Actually Is a Best Buy Today

I have a news flash for you, Best Buy (NYSE: BBY  ) : Nobody seems to like you.

Like a poor outcast on the playground, nearly everyone seems to think Best Buy's best days are long gone. Even the majority of my colleagues at The Motley Fool, including Rick Munarriz and Alyce Lomax, share highly pessimistic views of the big-box electronics and appliances retailer.

Well, I have one more newsflash for you, Best Buy: You still have one fan left. That's right, Best Buy -- I've got your back!

Now, I'm not going to sugarcoat what has been a string of very tough years for the big-box retailer, because that would just be ignoring the fact that it's facing some serious growth threats. Amazon.com (Nasdaq: AMZN  ) remains a formidable presence with Best Buy stores often being a staging ground for show-and-tell sessions for customers who want to feel and touch a product before buying it on Amazon for a marginal discount.

Then there's the sad fact that many retailers that have failed to innovate have gone by the wayside in recent years. Borders and Circuit City have both gone the way of the dodo within years after announcing their first store closures. Best Buy, similarly, announced its first store closures yesterday.

But things are going to be different for Best Buy, and here's why.

Innovation
Innovation comes in very different forms, and trying to come from behind to innovate is a lot easier for certain business types than others. For instance, after its earnings report last night, BlackBerry maker Research In Motion (Nasdaq: RIMM  ) looks like someone who just got out of a UFC fight. The company completely removed its future earnings forecasts in light of a complete revamping of its business, according to CEO Thorstein Heins. RIM has been eating Apple's (Nasdaq: AAPL  ) dust for nearly three years now, as it failed to properly see the looming competition in Cupertino's smartphones. In that time, Research In Motion has seen smartphone market share fall from 22% in 2009 to 10% in 2010.

Innovation works a lot differently for a big-box retailer. Don't get me wrong: Companies like Best Buy can't afford to let themselves get too far behind the curve, but they have a considerably longer length of time in which to adjust.

The company is focusing on closing 50 of its larger retail stores in fiscal 2013 and replacing them with 100 smaller, mobile-focused locations, and that move makes a lot of strategic sense. These stores will focus on higher-margin items such as phones and tablets that are helping keep Best Buy profitable and competitive. It will also be bringing its smaller mobile-centric work ethos of incentive-laden bonuses to its big-box stores.

Rick Munarriz seemed to really dislike this idea. I, on the other hand, simply see this as taking a concept that's worked elsewhere (but not everywhere). The incentives may reduce Best Buy's margin upfront, but it should contribute in the long run.  

This is no Circuit City
A lot of investors like to compare the failure of Circuit City to Best Buy. What I'd like to quickly remind everyone is that even though Circuit City was a competitor and carried similar merchandise, the two stores were never one and the same.

Shortly before the economy swan-dived into a recessionary disaster, Best Buy was bringing in a gross margin that was notably better than Circuit City's (24% vs. 21%), and its administrative expenses were demonstrably smaller than Circuit City's (15% vs. 25%). When The Wall Street Journal looked at these figures in 2008, it determined that Circuit City's $362 million operating loss through its first three quarters of that year would have actually been a $700 million profit had the company been executing as well as Best Buy, despite carrying similar products. CompUSA and Circuit City never executed as well as Best Buy, and I don't think the discussion holds much merit.

It's all about the Benjamins
When Circuit City began shuttering stores and laying off workers, it was in the midst of numerous quarterly losses. Best Buy, as I would like to remind everyone, is still very, very profitable. In fact, not many retailers can make the claim that they've grown sales in every year since 2002, or had their gross margin tightly bound between 23.9% and 25.1% since 2006. When push comes to shove, Best Buy is a cash flow machine, averaging $1 billion in free cash flow between 2004 and 2011.

The company's strong cash flow gives it the flexibility to pay out a dividend that has grown in size for eight straight years and currently yields 2.6%. Best Buy has been no slouch in repurchasing its shares, either. In 2006, Best Buy had 505 million shares outstanding; as of yesterday, that figure had fallen to just 366 million. I'd rather see these dollars go to work in the form of a dividend, but reinvesting in the business is a sign that management believes in the long-term direction of the company.

Foolish roundup
Perhaps the real reason everyone is coming down so harshly on Best Buy is the same reason investors have shaken the angry stick at Microsoft (Nasdaq: MSFT  ) over the past decade. Microsoft is extremely profitable and produces the most dominant operating system in the world, but somewhere along the way in the mid-2000s, it transformed from a pure growth company into a value-income play.

I see much of the same thing happening to Best Buy. The days of spectacular growth have faded and given way to slow-but-steady cash flow and sales growth. This doesn't make Best Buy any less great, though. It simply opens it up as an investment to a different group of investors who wouldn't have considered buying the stock before.

While Best Buy may find no love from the masses, at just 6 times forward earnings, a long history of sales growth, and the cash flow to back up a growing dividend, it has a friend in this investor. I've definitely got your back, Best Buy!

Disagree with me? Tell me about it in the comments section below, and consider adding Best Buy to your free and personalized Watchlist.

Best Buy may be a hot-button issue for many investors, but it's hard to argue against the amazing growth prospects of these three American companies. Find out who they are in our latest free special report.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He has been a loyal Best Buy customer since 2004. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Best Buy, Amazon.com, Apple, and Microsoft. Motley Fool newsletter services have recommended buying shares of Amazon.com, Apple, and Microsoft, as well as creating a bull call spread position in both Apple and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that costs the same whether or not it's in 3-D: free!


Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 30, 2012, at 8:29 PM, Risky88 wrote:

    it seems to me that most of the time Fool is saying to be wary when companies buy back stock they say HP as a example

  • Report this Comment On March 30, 2012, at 8:32 PM, lrob05055 wrote:

    Ever try to buy anything in a best buy? Nobody who works there knows anything at all about the merchandise they sell, and salespeople won't try very hard to provide info that isn't immediately available on the box or tag. It's a horrible franchise where you're almost guaranteed to pay more and get less. I wouldn't buy stock in best buy at 1 times earnings. I expect more from the Fool.

  • Report this Comment On March 30, 2012, at 9:02 PM, Dethklok wrote:

    I can't remember the last time I saw common sense and fact used when comparing Circuit City to Best Buy.

  • Report this Comment On March 31, 2012, at 2:17 AM, FoolinME2222 wrote:

    My experience with BBY staff is much better. But I have to disagree with the Fool. With so many online distributors, and their little overhead, the prices BB has to maintain to sell big boxes on the floor are too high.

    They may be profitable now, but you don't make money by simply showcasing items that can then be bought on line cheaper.

    I can't see this as a great buy. And I venture to guess BB will be all but gone in 10 years.

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