Are Shares of Best Buy Set for a Crash Landing?

Best Buy (NYSE: BBY  ) rose as much as 6% during Wednesday's trading after analysts at Jefferies upgraded the stock to "Buy," and raised the firm's price target from $13 to $24.

However, with shares of the electronics specialist up 60% so far in 2013, is it time to take some profits?

The good
Best Buy's fourth quarter fiscal 2013 results, announced last week, were certainly better than expected. On an adjusted basis, the company reported quarterly earnings per share of $1.64, versus analysts' consensus estimates which called for $1.53. Revenue for the quarter also beat analysts' expectations after squeaking out growth of 0.2%, to $16.71 billion.

As a result, adjusted free cash flow of $965 million came in on the high side of Best Buy's previous guidance, which called for free cash flow between $850 million and $1.05 billion.

In addition, as Jefferies noted, Best Buy is showing notable progress after its recent management shakeup brought in new blood with "experience in turnarounds and growth of both physical and online businesses" -- a reference to CEO Hubert Joly's previous experience in helping save the sinking ships of Vivendi's video game business unit, privately owned consulting firm McKinsey & Co., and French-based Electronic Data Systems (now part of Hewlett-Packard).

As it stands, investors are reassured that Joly has outlined a tangible turnaround plan, which seems to be bearing fruit. This is more than other plunging retailers like J.C. Penney  (NYSE: JCP  ) can say -- for the time being, anyway. Still, Best Buy undoubtedly has plenty of work to do before it's truly out of the woods.

As an aside, on the heels of J.C. Penney's wretched quarterly earnings, does anyone else find it ironic that J.C. Penney's stock skyrocketed more than 17% the day it chose turnaround specialist and former Apple exec Ron Johnson as its CEO? Poor Best Buy, on the other hand, fell 10% the day it tapped Joly as its new CEO.

Now, however, while expectations have remained undoubtedly low regarding Best Buy's ability to successfully compete against retail's long-term oriented, 800-pound digital gorilla, Amazon.com, (NASDAQ: AMZN  )  the stock's 60% jump in the past two months alone shows that investors are clinging to the hope that all isn't lost quite yet. Even after the rally, shares of Best Buy are still down more than 20% over the past year, so they could have even more room to run should the company continue to show progress in stabilizing its operations. 

The bad
With this in mind, by opting not to provide fiscal 2014 guidance, Best Buy's management sure isn't giving investors much to help predict when that stabilization might actually occur. However, CFO Sharon McCollam was quick to warn investors that the company expects its "first quarter to be under significant pressure."

Why? In addition to the fact that pre-Super Bowl television sales were shifted into its fourth quarter results, Best Buy will surely suffer from the impact of its recently launched online price match program, with which it hopes to prevent consumers from "showrooming" -- that is, stepping into a physical Best Buy location only to get a first-hand peek of the products that they intend to purchase at a cheaper price online.

So, what's the problem with this mentality? Best Buy's behemoth brick-and-mortar operations, while steadily shrinking, still represent a significant overhead disadvantage when compared to online-only competitors like Amazon.com, and its near-fanatical focus on streamlining operations, all in the name of offering lower prices to consumers.

Without the burden of physical stores to maintain, Amazon is free to focus more energy on forward-looking initiatives like bolstering its world-class website, and building new strategic warehouse locations to improve delivery times. In addition, Amazon isn't afraid of making acquisitions of complementary cutting-edge companies, including its $775 million purchase early last year of Kiva Systems for its orange swarm of warehouse-optimizing robots. Given Amazon's edge, one can't help but wonder how long Best Buy will be able to stand the pressure of promising to match online prices before it has to renege.

Unfortunately, Best Buy's comparable store sales aren't looking great, either. While domestic comparable sales managed to grow 0.9% (coinciding with a 10 basis point decline in gross profits), part of those increases were the result of the aforementioned shift in pre-Super Bowl television sales. In addition, while comps in Europe also grew, total international comparable sales fell 6.6%, largely thanks to double-digit comp declines in Canada and China.

The unknown
Even so, Best Buy's stock remains on a tear, with hopes that the company can once again exceed expectations in the coming quarters. While the stock may have some upside left, playing short-term fluctuations isn't exactly the most Foolish thing to do. Considering management's comments for the coming quarter, then, I won't be willing to buy shares of Best Buy until it can prove it has what it takes to not just survive, but also thrive over the long haul.

More expert advice from The Motley Fool
The brick-and-mortar versus e-commerce battle wages on, with Best Buy caught in the middle. After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. How will new leadership perform? Will old leadership take the company private? Will a smaller store format work out for both the company and its brave investors? Should you be one such brave investor? To help answer all these questions, The Motley Fool has released a new premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report today.


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

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 07, 2013, at 6:48 PM, mistacy wrote:

    BBY rally not sustainable on the speculation. Due for a pull back. Will fall dramatically faster than it went up.

  • Report this Comment On March 08, 2013, at 1:04 AM, CarlsbadMac wrote:

    Best Buy has continually failed on many fronts: Not following their corporate-stated guidelines at the local level (which could be there as lip-service only), alienation of its dwindling client base through poor treatment of its customers in store, online and on their toll-free telephone lines and not carrying a diverse-enough line to appeal to the impulse buyers.

    At this point, their failure is inevitable. Why? Because the well has been poisoned, the name is mud among those (like myself) who have to buy computers, HDTVs, networking and video/camera gear as part of our business. A recent failure to price match their own website for me in-store cost them $2,200 in sales that week and another $9,000 in a proposal I have submitted. That's just one guy in Southern California!!! Plus, Fry's is willing to offer discounting with a smile when I buy four 50" LCDs at a time. Try that with a Best Buy manager and you get stammering and a failure to commit on the spot. Due dilligence bids are all they are good for, and that's a joke too.

    Good-bye Best Buy

  • Report this Comment On March 28, 2014, at 3:00 AM, jackfleming wrote:

    International revenues of BestBuy were down 11.3% to $1.52 billion while comparable stores sales fell 6.4%.

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