Does Best Buy's Stock Live Up to Its Name?

Since its founding in 1966, Best Buy (NYSE: BBY  ) (NYSE: BBY  ) has been a promised land for tech consumers who want to get their hands on the latest and greatest offerings. Customers could look at, and often try out, what they're interested in and then make their purchases on the spot.

That trend is fading fast in the online era. Customers no longer do a lot of their shopping in the bricks-and-mortar stores that made Best Buy so successful. Instead, they're looking toward online retailers such as Amazon.com (NASDAQ: AMZN  ) .

BBY Revenue Quarterly YoY Growth Chart

BBY Revenue Quarterly YoY Growth data by YCharts

As consumers shift toward online retail, Best Buy faces hard times. Revenues have been showing negative growth since the end of 2011, with the most recent quarter shrinking by 9.6%.

Out with the old, in with the new?
Amazon should send Best Buy a thank-you note for effectively acting as its product showroom. More and more, consumers have been leaving Best Buy stores empty-handed and logging on to Amazon when they get home. While they're there, customers can search through just about anything they could ask for at competitive prices -- much more than they could get at Best Buy.

Amazon is clearly the go-to hub for e-commerce regarding just about any type of product. On top of that, the company has been doing a great job expanding product lines of its own, such as the Kindle. According to the its April 25 conference call, of Amazon's top 10 selling products, all 10 of them are Kindle or digital-related.

Where Best Buy's revenue generation has been struggling as of late, Amazon has been posting solid numbers. Yearly revenue growth has been strictly positive, showing rates in the 20%-30% range for two years running.

Let's talk quantity
However, the numbers at Best Buy may not be quite as bad as they seem, since management attributes 7.1% of its revenue contraction since 2011 to a shift in fiscal-quarter dates. Of the remaining portion, comparable-store sales were down by just 1.2% compared with the same quarter in 2012.

With the help of new CEO Hubert Joly, Best Buy is incorporating a new business strategy called "Renew Blue," in which the company will hope to increase store sales through the use of partnerships, such as the ones it has already secured with Samsung and Microsoft. These agreements should go a long way in increasing Best Buy's store image and marketability.

On top of revamping its bricks-and-mortar stores, Best Buy is investing heavily in e-commerce and is already finding success, including a 16.3% increase in domestic comparable online sales.

But when it comes to success at bricks-and-mortar companies, one company stands above the pack. Costco Wholesale (NASDAQ: COST  ) is similar to Amazon, in that it sells a vast array of products, from deli meats to electronics.

COST Days Inventory Outstanding Chart

COST Days Inventory Outstanding data by YCharts

Costco has its own select product lines, but much of its business centers on selling high volumes of products to customers at prices that are only possible by selling in bulk. Costco's revenues have been rock-solid, maintaining a growth rate of around 10% for the past two years. Accordingly, for Costco to maintain healthy margins, it must have a high rate of inventory turnover, and it's done just that. Costco's inventory turnover is cyclical, but it retains a predictable and healthy pattern.

In the past, my research has incorporated a Motley Fool Earnings Quality score, or EQ, that taps into a database that ranks individual stocks. The database designates an "A" through "F" weekly ranking, based on price, cash flow, revenue, and relative strength, among other things. Stocks with poor earnings quality tend to underperform, so we look for trends that might predict future outcomes.

Stock

Current Price

July 17, 2012, Price

% Increase / Decrease 

EQ Score

Best Buy

$28.50

$18.8

36.1%

B

Amazon

$308.70

$216.9

29.7%

F

Costco

$117

$96

21.9%

F

All three stocks have performed well in the past year. Even though Best Buy has struggled to grow its revenues, the stock has climbed with the market and has been the best performer of the bunch. Part of the reason it has such a higher EQ over Amazon or Costco is that expectations were so low that any acceleration in the fundamental trends were likely to lead to outsized stock-price performance.

If management can execute its "Renew Blue" plan effectively, then Best Buy stock could continue to climb as the company finds even greater success.


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