Has Best Buy Finally Turned the Corner?

Best Buy's dividend hike is a strong signal to the market that the electronics retailer has confidence in its future.

Jul 4, 2014 at 10:30AM

Source: Wikimedia Commons.

With all the negative sentiment in the electronics retail business, how should investors evaluate Best Buy's (NYSE:BBY) recent dividend hike?

On June 10, Best Buy announced that its quarterly cash dividend would increase by 12% from $0.17 to $0.19, and this raised some eyebrows among investors.

The dividend hike certainly came as a surprise given that the retailer is still struggling with the erosion of its revenue base and a high reliance on its Renew Blue cost-savings program to deliver value for shareholders.

A company in the midst of a restructuring does not usually increase its dividend payments to shareholders. Quite often the opposite occurs: Companies undergoing profound restructurings cut back on dividend payments first as they can usually divert those cash flows the easiest.

It's about the cash, not the revenue
Sure, investors would oppose cutting or suspending the dividend, but for the sake of the survival of the company, most investors would probably be willing to go along with it.

Best Buy hiked its dividend even though the company reported a 3.3% decline in year-over-year sales and a comparable-store sales growth rate of minus 1.9% for the first quarter of fiscal 2015. In addition, a persistently low adjusted operating income margin of 2.3% and a lower gross profit margin of 22.4% compared to last year's 23.1% certainly didn't make investors cheerful.

However, while investors mostly concentrate on revenues, comparable-store sales growth and margin development, there is another side to the equation. It is true that electronics retailers continue to suffer from intense e-commerce competition. Nonetheless, Best Buy presented a variety of year-over-year improvements worth mentioning.

Improving cash position
First, Best Buy's cash and short-term investments showed a combined balance of $3.1 billion compared to last year's $908 million; this is probably the main reason that Best Buy can afford to increase its dividend without putting its turnaround at risk.

Second, Best Buy reduced its selling, general, and administrative expenses by 8% or $164 million year over year. And last but not least, Best Buy's cash flow has meaningfully improved in the last quarter and came in solidly positive at $308 million.

With a much better cash position and a cost-reduction program that seems to be yielding results, the company can indeed afford to increase its dividend payments.

Hubert Joly, Best Buy's president and chief executive officer, commented on the dividend hike: "Our decision to increase the amount of cash we are returning to shareholders is indicative of our improved cash position and our confidence in the cash-generating power of our multi-channel business model."


Best Buy CEO Hubert Joly. Source: Wikimedia Commons.

Hubert Joly seems to be making the right moves. For instance, Best Buy's first-quarter announcement revealed that the retailer achieved $95 million in additional annualized cost reductions, which should certainly help Best Buy's margins going forward. Joly remains focused on getting costs in check, which is about as much as the company can do now until a new turnaround plan is presented to investors.

As part of the turnaround plan, Best Buy will likely put some more emphasis on downsizing its operations. The Wall Street Journal reported last month that Best Buy intends either to seek a strategic partner for or to sell its Chinese electronics retailer franchises Five Star and Best Buy Mobile, and the transaction could be worth up to $300 million.

A sale of its China business will certainly help Best Buy in focusing on its U.S. operations, which are at the core of its franchise.

Short-term sales risks persist
While the company is still relying on cost savings and SG&A cuts to deliver value for shareholders, Best Buy still needs to come up with a road map for increasing store traffic and stopping the bleeding on the sales front.

Eroding sales are not just a problem for Best Buy. A secular demand shift to e-commerce businesses is largely to blame for the declining revenues of electronics-focused brick-and-mortar businesses.

Electronics retailer RadioShack (NYSE:RSHCQ), for instance, is also seriously struggling with low store traffic and eroding sales. In the first quarter of fiscal 2015, RadioShack reported that same-store sales were down 14% while its loss massively widened to $98 million.

The retail business is no easy business. Customers quickly punish retailers that fail to offer attractive products at competitive prices. Apparel retailer J.C. Penney (NYSE:JCP), for instance, also saw a massive erosion of its sales base throughout much of 2012 and 2013: Its revenues declined a whopping 31% over the last two fiscal years to $11.9 billion as the company alienated customers by reducing promotional activities.

Both RadioShack and J.C. Penney highlight the fact that customers can be lost quickly if dissatisfied -- and that it can be incredibly difficult to make them come back.

Although J.C. Penney reported positive comps growth of 6.2% in its most recent quarter, the company does not pay a dividend to its shareholders. Just like RadioShack, J.C. Penney used to pay quarterly dividends until 2012, but suspended payments to shareholders in order to shore up its balance sheet and fully focus on its restructuring.

Given their ongoing, difficult turnarounds, both companies are unlikely to reinstate their dividend payments anytime soon, whereas Best Buy's dividend hike is a strong signal to the market that management has confidence in Best Buy's turnaround.

The Foolish bottom line
The decision to make a dividend move in the midst of Best Buy's restructuring signals that management under the leadership of Hubert Joly is optimistic that the electronics retailer can turn the ship around for good. With its solid cash position, improving profitability and higher operating cash flows, it increasingly looks like Best Buy can repeat its 2013 turnaround success.

Speaking of success: A sneak peek at Apple's next smart device
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Kingkarn Amjaroen owns shares of Best Buy and J.C. Penney Company. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers