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Where's Best Buy Heading in 2013?

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Best Buy  (NYSE: BBY  ) will release its holiday sales report on Jan. 11, which will shed light on the murky situation of being a big-box store in an Internet economy. But before these figures are released, let's evaluate Best Buy's recent performance to see if grabbing shares might make sense.

Same-store sales
For Best Buy, same-store sales have been in a tailspin that is becoming more out-of-control. The last quarter in which same-store sales actually increased was back in its second quarter of 2011. Since then, there have been nine straight quarters of declines, with each new year returning worse numbers:

Source: Best Buy Store Statistics.

Free cash flow
With declining sales, free cash flow has also taken a hit. And as cash flow dips, the chances that Best Buy can continue to pay off creditors and suppliers falls, as well as the chances that it can reinvest and reinvent its business:

BBY Free Cash Flow TTM data by YCharts.

With its cash flow falling close to recessionary levels during an economic recovery, investors should think hard about Best Buy's ability to turn the business around.

Profit margins
Looking at the bottom line, things are trending in the wrong direction for profit margins.

BBY Profit Margin Quarterly data by YCharts.

Moving to smaller store formats may help reverse this trend. But trying to win back customers through competitive pricing will keep taking its toll -- like the reported $65,000 one-day loss when price-matching Wal-Mart's (NYSE: WMT  ) $127 iPhone 5. If a business is losing money selling iPhones, one might question what it can make money on.

Management and ex-management plans
New CEO Hubert Joly came out with a turnaround plan he called "Renew Blue." The five-point plan is below:

  1. Reinvigorate and rejuvenate the customer experience.
  2. Attract, grow, engage and inspire transformational leaders and energize the employees to deliver extraordinary results for all our stakeholders.
  3. Work with vendor partners to innovate and drive value.
  4. Increase the company's return on invested capital, based on an unrelenting focus on revenue growth, efficiency and disciplined capital allocation.
  5. Continue Best Buy's leadership role in positively impacting our world and making it a better place.

While Joly attempts to meet these goals, founder and former CEO Dick Schulze now has until Feb. 28 to make a buyout offer for the company. Last year, he offered around $24 per share for the company, but may be able to structure a deal for much less as the stock now sits around $12 per share. But no deal is certain, and Schulze may realize just how dire a situation his old company is in and opt for a peaceful retirement instead.

The Wall Street Journal reports that Bank of America's analysts "do not expect an offer to materialize from Schulze." Additionally, "even if one does, the analysts don't expect it to match the $24 to $26 a share he was considering months ago." With a lower bid, the analysts expect the board to reject any offer. If buyout rumors do appear, prepare for a roller coaster of a stock price until anything is finalized.

Holiday sales
According to holiday reports, national sales grew 0.7% this season. Across the retail industry, Target  (NYSE: TGT  ) had flat same-store sales in December, compared to Macy's  (NYSE: M  ) which had same-store sales climb over 4%. Online,  (NASDAQ: AMZN  ) with its typically cryptic results, noted that third-party sellers sold 40% more units this holiday season.

The long view
Turnarounds have happened. Look at AppleIBM, or Starbucks. The question is, were these companies in as dire a situation in terms of industry, brand, and operations as Best Buy? And is Joly going to be named a great CEO like Steve Jobs or Howard Schultz in the future? Such a large company has a lot of inertia to overcome in order to change its direction toward a better outcome. Investors who believe in such an outcome would likely be handsomely rewarded, but as always, outsize returns come with plenty of risk.

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