Best Buy, Yahoo!, and Rite Aid Have the Same Problem

Life has been good for Best Buy (NYSE: BBY  ) , Yahoo!, and Rite Aid (NYSE: RAD  ) investors. All three stocks have more than doubled in value over the past year, and in Rite Aid's case we're seeing share values that have more than quadrupled!

However, all three companies have another thing in common, and it's not something that you typically see in equities that are clobbering the market. I'll spare you the suspense: Best Buy, Yahoo!, and Rite Aid aren't growing their top lines.

The consumer electronics superstore chain, dot-com pioneer, and drugstore operator are making serious gains on their bottom lines, but the actual state of their businesses remains surprisingly stagnant. Wall Street sees it staying that way in the near term. 

Let's take a look at revenue growth projections for all three companies.

 Company This Year Next Year
Best Buy (13.5%) 0.1%
Yahoo! 0.2% 2.6%
Rite Aid (0.3%) 0.5%

Source: Yahoo! Finance.

It may seem a bit jarring. Everyone's buzzing about the job that Hubert Joly has done since taking over as CEO at Best Buy late last year. This year's growth will be held back by several springtime closures last year, but even on a more apples-to-apples basis the market still sees flat growth next year. Wasn't the opening of Microsoft and Samsung stores within its stores supposed to drum up traffic and revenue?

Like Best Buy, Yahoo! also had a new CEO come in last year to rave reviews. Marissa Mayer has done an outstanding job in her rookie year, but it's not something that we're seeing in online ad growth. 

Best Buy and Yahoo! are experiencing a renaissance of internal morale. It's cool again to work for Yahoo!. None of the other previous Yahoo! CEOs -- and it was a revolving door for a while -- ever warranted a Vanity Fair cover story. Best Buy is winning back its once-shiny reputation by cutting costs and passing them along to consumers in the form of more compelling prices. That's going to pay off in the future, but for now the market hasn't responded accordingly. Advertisers and consumers aren't flocking to the companies the way that investors have over the past year.

That's fine. They will come.

Rite Aid also isn't ringing up a lot more sales than it did a year ago, when its stock was trading for less than a quarter of today's price. However, slightly positive comps and a year of consistent profitability add a lot of credibility to an investment.

An absence of revenue growth may not be a deal breaker right now. Yahoo! and Rite Aid in particular are experiencing spectacular bottom-line growth this year, with forecasts calling for healthy upticks next year. Best Buy is actually taking a step back on the bottom line this fiscal year, but there's growing faith that the once-daunting task of turning the company around is actually quite possible under its new CEO.

However, margins can only be widened for so long before revenue growth has to carry the load. If these three stocks expect to continue their winning ways, they'd better be growing again a year from now.

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  • Report this Comment On October 07, 2013, at 6:38 PM, KrisShankar wrote:

    That's amusing. Forbes' Intelligent Investor column recommended RAD as great investment due to the turnaround and generally favorable healthcare macro environment.

    I guess this obsession with the top line has some investors unable to see the forest for the trees.

  • Report this Comment On October 09, 2013, at 11:24 AM, ghstflame wrote:

    RAD's top line will continue to shrink as more generics come to market...but that is to be expected. Their margin on the generics will increase substantially causing more of each $$$ spent to stay within the company, which is what RAD desperately needs.

    See you @$10

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7/22/2014 4:01 PM
BBY $30.88 Up +0.75 +2.49%
Best Buy CAPS Rating: *
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Rite Aid Corp CAPS Rating: **

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