Why Best Buy Stock Is Down 25% This Year

Across the board, electronics retailers have struggled this year, and it's no secret why. Online retail continues to gain market share as Amazon.com sees sales grow 20% a year, and many stand-alone products such as DVDs have gone digital, and others like video cameras and GPS devices are now contained within smartphones. Compared to peers like RadioShack and hhgregg, who have seen their share prices fall by 68% and 35%, respectively, Best Buy's  (NYSE: BBY  ) year actually doesn't look so bad with its stock down only 25%. And this year's slide came after shares more than tripled last year under a turnaround strategy led by new CEO Hubert Joly, so perhaps things aren't so terrible at the big-box powerhouse. Let's take a look back at the year that's been for Best Buy and see what its future direction might be. 

BBY Chart

BBY data by YCharts.

As you can see from the chart above, this year's drop is entirely due to holiday-season results that sent the stock plummeting 29% on Jan. 16 when the company provided an update to investors. In that report, the retailer said domestic same-store sales fell 0.9% in the nine-week holiday period, on an overall decline in revenue of 2.6%. Because of the intensely promotional competitive environment, which saw Best Buy slash prices to keep up with other retailers, its bottom line took a particularly hard hit as operating margin fell 175 to 185 basis points. The holiday quarter is key for Best Buy, as more than half of its profits come from those three months. In the complete report, the retailer turned in an adjusted per-share profit of $1.24, down from $1.47 the year before.

Notably, since the stock tumbled on the holiday sales report, shares have steadily gained, climbing 20%. The company's Q4 results from a year ago were perhaps not as bad as feared, and the stock rose 4% when the actual report came out, easily beating EPS estimates at $1.01.

Shares held relatively steady in the spring as the company announced a partnership with SolarCity to sell its solar-power financing service at some Best Buy locations. Then in April, its U.S. retail chief resigned unexpectedly, causing shares to fall 5% in just two days. The company said it would shift that position's duties to the chief human resources officer.    

In its first-quarter earnings report, the only other one of the year thus far, Best Buy again sped past earnings estimates, posting a per-share profit of $0.33, up a penny from a year ago, and topping estimates of $0.20. While same-store sales continued to fall, declining by 1.9%, and overall revenue dropped 3.5% to $9.04 billion, missing estimates at $9.23 billion, the stock still finished up 3.4% on the day. CFO Sharon McCollam also said same-store sales were expected to be negative in the second and third quarters due to declines in consumer electronics and softness in mobile phones.   

Since that May 22 report, Best Buy shares have continued to creep higher as the company raised its quarterly dividend on June 10 to $0.19 from $0.17, giving investors a 2.7% yield. The dividend hike may seem like an odd move for a company seeing sales decline, but Joly said the decision is reflective of the company's "improved cash position and our confidence in the cash-generating power of our multichannel business model." Indeed, cash and short-term investments on its balance sheet jumped from $908 million in May 2013 to $3.07 billion in May 2014, showing its cash position has vastly improved.

Finally, on June 25, shares bounced back over $30 on reports that Best Buy was considering selling its Chinese businesses, which go by the name of Five Star and Best Buy Mobile. Best Buy's international operations have long been seen as a thorn in the side of the company as international comps fell 5.8% in its most recent quarter. A sale could fetch the retailer $300 million, according to sources.

Where Best Buy stands today
CEO Hubert Joly has given the company a second life since coming on board in the fall of 2012. As of its last report, profits and gross margin are moving in the right direction, and the company is gaining market share despite seeing sales edge lower, an indicator that sales are falling faster industrywide. Among Joly's strategic decisions: closing unprofitable stores; implementing its Renew Blue cost-cutting plan, which to date has shaved off $860 billion in annual expenses; investing in customer service and in online sales, which grew by 29% last quarter; and divesting international businesses to focus on core U.S. sales, including the sale of its stake in Carphone Warehouse last year and the reports that it may sell its Chinese business.

In some ways, Joly is a victim of his own success, as Best Buy shares had been bid up significantly last year, making a correction more likely. Still, the company's recent dividend hike is an indication of its improved position both competitively and in terms of liquidity on the balance sheet.

Foolish bottom line
Despite Joly's success, there are significant headwinds facing Best Buy. With comps continuing to fall, growing profits will become more difficult as cost-cutting can only do so much. Still, Best Buy is outperforming its industry and the likely collapse of RadioShack should favor it in the near term. I wouldn't necessarily bet on Best Buy to be prospering 25 years from now, but besides being a solidly profitable company under smart leadership, the stock is also affordably priced and pays a decent dividend. The macro factors may not favor the company in the long run, but counting it out at this point would be a mistake. 

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