Best Buy's Fall Has an Upside

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

In retail, there's no better way to assure your customers than by offering them a price match. People love the price match. As it turns out, not many of us actually use it -- probably 5% to 10% of holiday transactions, according to Time -- but it brings in the foot traffic. That's all well and good, unless you're one of the outliers -- a business that has heavy exposure to price-matching. Best Buy (NYSE: BBY  ) announced Monday that it was going to take a margin hit over the holidays because of rampant price-matching. The market was not excited, and the stock dropped like a stone during the day.

But hold on, there's a bit more to Best Buy's earnings report than just "Look out for margins falling." While the business is still not beating the world, there are a lot of bright spots for Best Buy's long-term future hidden in this release. Here are some of the brighter points.

Sales finally level out at Best Buy
Best Buy's third quarter delivered the first positive, year-over-year comparable-sales change in a long time. The company finally sold more per store this year than it did last year, and that's nothing to ignore. On top of the sales growth, it also pushed its operating margin up year over year. The combination of more sales at a better rate is clearly a good thing.

Now, the increase was small -- 0.3% -- but it may indicate that Best Buy has finally hit the bottom of its sales freefall. That small change in sales also helped the business beat out market estimates for earnings per share, bringing in $0.16 compared to the consensus forecast of $0.11.

Best Buy's segments continue to divide
The sales mix at Best Buy has continued the trend that set up earlier in the year: the business leveling out sales of consumer electronics, growing its mobile phone and appliance businesses, and watching its entertainment business drop like a stone. The fourth quarter is likely going to be better for entertainment, with the launch of the new Xbox and PlayStation.

The entertainment business is also suffering from a drop in physical media sales -- CDs and DVDs -- and that's not going to come back in a meaningful way. Luckily, phone sales should continue to be strong over the holidays.

Danger is still omnipresent
While the sales mix continues to work out in the manner that Best Buy is planning for and while sales have been increasing, there are still lots of downsides here. First of all, the company's margins got a small boost from a credit card agreement that it expects to have a negative long-term effect on margins. Second, price-matching could hurt the company, with brands like Target (NYSE: TGT  ) and Wal-Mart (NYSE: WMT  ) offering similar products for lower prices this holiday season.

Wal-Mart has been especially forceful in its price-matching, putting out a statement naming Target, Best Buy, and Toys R Us specifically for Black Friday matching. For its part, Target has extended its price-matching program, although it won't apply to Black Friday deals.

Best Buy is up against stiff competition, and the change in sales may just be a blip. The company is anxious to succeed this holiday season, but that may come at the expense of margins, which may prove a hollow victory. On the other hand, a hit on margins may be worth it for getting more customers through the door and eating up a bit of market share to get some new repeat visitors. In short, the future is still cloudy, but there's more to Best Buy than just bad news.

Looking ahead to 2014
While 2013 has been a hard time for retailers like Best Buy, it's been great for the stocks, in general. The market stormed out to huge gains this year, leaving investors on the sidelines short. However, opportunistic investors can still find well-priced winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our free in-depth report, simply click here.

Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2735188, ~/Articles/ArticleHandler.aspx, 9/30/2016 6:20:19 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,308.15 164.70 0.91%
S&P 500 2,168.27 17.14 0.80%
NASD 5,312.00 42.85 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 4:01 PM
BBY $38.18 Up +0.77 +2.06%
Best Buy CAPS Rating: *
TGT $68.68 Up +0.96 +1.42%
Target CAPS Rating: ***
WMT $72.12 Up +1.39 +1.97%
Wal-Mart Stores CAPS Rating: ***