Shares of Best Buy
How it got here
Best Buy should be sending thank-you cards to companies like Research In Motion and Chesapeake Energy, because without them, it'd be the laughingstock of Wall Street.
Best Buy has been suffering from both internal problems and a struggling business model. Internally, former CEO Brian Dunn is under investigation for having had an improper relationship with a company intern and allegedly misusing company funds. That's a damaging blow to a management team that put their full faith behind Dunn just weeks after he unveiled a plan to turn around the company's ailing business.
The company's big-box business model is also at risk. Consumers are basically using a Best Buy store as an electronics showroom and then using deals on online retailer Amazon.com
Best Buy has planned to close 50 of its larger stores in favor of 100 smaller, mobile-oriented locations in an effort to reduce costs and maximize employee efficiency. In addition, employees will soon be incentivized with sales bonuses, which I suspect will have a positive impact on sales -- however, many of my Foolish colleagues disagree.
How it stacks up
Let's see how Best Buy stacks up next to its peers.
Clearly, Amazon has been the runaway winner among electronic retailers, with its price-cutting deals and convenience being deciding factors in driving its sales higher.
5-Year Revenue CAGR
Source: Morningstar, author's calculations. CAGR = compound annual growth rate.
Don't fall over, but that is indeed correct: Best Buy is outpacing Wal-Mart in revenue growth. In fact, outside of Conn's, which has only recently turned its operations around, Best Buy, Wal-Mart and Amazon have all grown sales in each year over the past decade -- no small task considering that we experienced our worst recession in 70 years three years ago. What investors are having the toughest time with is in realizing that Best Buy is no longer a growth company; it's a value play. At just two times cash flow and roughly five times forward earnings, Best Buy investors look to be getting a legal five-finger discount (aka a steal).
Now for the real question: What's next for Best Buy? That question is going to depend on whether it can smoothly transition into a smaller-store business model and if it can truly compete with Amazon.com. It is ramping up its Internet efforts, but "Will they be enough?" is the question still to be answered. Even if Internet sales grow to $4 billion as management expects by 2016, it will still likely represent 8% or less of Best Buy's total sales.
Our very own CAPS community gives the company a dreaded one-star rating (out of five), with 20.9% of members expecting it underperform. In my usual contrarian fashion, I've been one of the few vocally optimistic Fools to rally in support of Best Buy. My current CAPScall of outperform, though, has gone in the opposite direction and is currently down 35 points. But don't look for me to close that call anytime soon.
Best Buy does have its fair share of problems; there's little denying that. But it'd be wrong to ignore that Best Buy is strongly cash flow positive and valued far below its sector peers, who arguably aren't growing that fast either (Amazon excluded). Best Buy is gearing its business to focus on higher-margin mobile and tablet products, which should help it maintain the very tight margins that make its dividend and cash flow so predictable. Throw out the Circuit City comparisons because these two businesses aren't even remotely alike, and consider Best Buy a great value play going forward.
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