Is Best Buy Still a Turnaround Play?

Despite Best Buy's (NYSE: BBY  )  business model eroding out from under it, the stock has done quite well over the past 12 months, in part driven by a buyout offer from its billionaire founder. More encouragingly, the recently ended quarter showed management's cost-cutting efforts were effective, and that the company can find growth in its web sales despite the gorillas in the space. It's odd, during an earnings season in which many retailers struggled to find good news, that one of the market's least-favored retail stocks proved to be one of the better players in the space. The question now is: Is Best Buy on a path to recovery or was this the last puff of air from a dying horse?

Tough question
For too many retailers, the question du jour regards the future -- mainly the Internet's impact on the businesses. For retailers selling items that you don't need to try on for size, it's particularly poignant. Very few things at Best Buy cannot be bought online for a more favorable price, without the risk of them not fitting.

Couple that with too many stores, and too much square footage within those stores, and you've got yourself one troubling business model. This was the story several months ago for Best Buy, when the stock traded well under the $20 mark (at one point in the $11s).

Luckily, with the founder's buyout offer to buoy the stock price in the short term, Best Buy management was given the rare luxury of time to enact cost-cutting measures and push the viable areas of the business. Even though Richard Schulze eventually made no such offer, officially it took some pressure off of quarter-to-quarter performance.

Now, for the second quarter of 2013, Best Buy has something to show its investors.

Nice results
Driven by an aggressive $725 million annual cost-cutting program, which included closing underperforming stores and laying off employees, Best Buy was able to jump over analyst expectations. In the first nine months of its efforts, the company shed $390 million in costs. In the meantime, its online sales grew by a very impressive 10.5%. Accounting for pre-orders from new gaming consoles, web sales would have grown even more -- 16%.

This marks the first quarter in five that the company has turned a profit, and it beat analyst expectations by a whopping $0.20 per share.

By all measures, Best Buy outperformed and showed investors and analysts it can survive, but survival does not warrant investment.

What's done is done
While much commendation is owed to management, the low-hanging fruit of cost-cutting has largely been accomplished, and the company cannot necessarily repeat these results going forward.

Best Buy's stock performance was a matter of priced-for-death valuation and timing, and at its richer valuation today is not too appealing a buy. Investors interested in the 2.2% dividend may want to take a closer look. However, other options in the electronics retailing space may be more appealing.

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