Best Buy's Digital Dominance

• Email
• Share
• Print

Maybe it's the blue and gold colors of my alma mater, East Meadow High School, that get me going -- or possibly it's the amazing product selection and prices -- but every time I walk into Best Buy (NYSE: BBY) I know the experience is going to be as interesting as watching Donald Trump fire someone on The Apprentice.

Investors have come to expect strong results from the leading electronics and entertainment retailer, and the company has been nothing but rock-solid as of late. Best Buy earned $0.46 per share in the second quarter, which was 10% ahead of last year's earnings and a cent better than the consensus estimate (before a $0.07-per-share, one-time charge). Revenues grew 13% and same-store sales were up 4.3% in the quarter as the company continued to leverage its digital products. Best Buy considers itself "the authority on digital products" and thinks its "success with customers who really enjoy a digital lifestyle really made the quarter."

Looking ahead, the company expects to earn between $0.41 to $0.47 per share in the third quarter ($0.44 per share is the consensus estimate) and $2.80 to $2.93 per share for 2004 ($2.90 previously expected). This growth will be driven by third-quarter revenue growth of 19% (same-store sales growth of 3% to 5%) and full-year revenue expansion of 12% (4% to 6% same-store sales rise). This guidance reflects the continued strength Best Buy sees in digital TVs, MP3 players, notebook computers, home theater and digital imaging, and improvements anticipated in the appliance and DVD movies categories.

Best Buy's revenue growth compares favorably to its competitor Circuit City (NYSE: CC), which reported a 2.9% increase in second-quarter same-store sales (vs. 4.3% growth for Best Buy). August same-store sales for other similar retailers were mixed: Sears (NYSE: S) reported a 6.1% decline; Costco (Nasdaq: COST) was up 3%; BJ's Wholesale Club (NYSE: BJ) rose 4.5%; Target (NYSE: TGT) increased 1.8%; and Wal-Mart (NYSE: WMT) scraped out a 0.5% gain.

The company said its same-store sales remain on track despite weather-related store closings in Florida. Best Buy continues to maintain a stranglehold over its market share, and it has been using excess cash to repurchase shares (1.4 million bought back in the second quarter alone). The shares, which are about 17% off their 52-week high of $62.70 in late November, are trading at an attractive 18 times this year's earnings forecast relative to its 19% growth rate. To sweeten the pot, the company has recently announced a 10% dividend increase (to $0.11 per share) on shares that currently yield 0.80%.

Plop down on your favorite sofa, pop in your favorite CD, and click on some of these views:

• The Next Home Run Stock
• Betting on Best Buy
• Best Buy for Entertainment

Phil Wohl spent more than 12 years on Wall Street and now concentrates his writing on more fictional characters. He has no stake in any firm mentioned above.