Maybe your college had a horrible football team -- mine didn't even have one -- so any win was a cause for celebration. Out came the old couches onto the lawn, and you doused that beautiful off-green upholstery in kerosene and warmed yourself up while you waited to be arrested. The point is that you had a reason to celebrate even when things weren't going "well" in the traditional sense. That's what's going on at Best Buy (NYSE:BBY), where investors this week dragged the futons out the front door and grabbed the marshmallows.
Holiday sales were down, but not as much as they could have been. Hurrah! In fact, they fell slower than the rest of the retail sector, according to most reports. The big box dropped 1.4% year over year, while retailers in general fell about 3%. The stock jumped more than 10% on the good news, but investors may wake up tomorrow in that cold, couchless house wondering if it was all worth it.
So was it?
The skinny on the sales
Let's not kid ourselves: A 1.4% fall isn't great. While Amazon.com (NASDAQ:AMZN) didn't release official numbers, analysts estimate that it saw close to 30% growth over the holidays. And we know that Target (NYSE:TGT), which had a weak holiday season, managed to break even on its comparable sales in December.
Best Buy's fall may have beaten the average, but it's not making up any ground against the leaders of the pack. Apart from the sales figures, Best Buy is also staring down an unfavorable product mix, causing more concern for the company.
Holiday sales moved away from the big-ticket items that used to be Best Buy's bread and butter. Instead, customers came in for cell phones and tablets, a trend that's having a negative effect on Best Buy's free cash flow, as the company dropped its forecast for free cash flow for the year from at least $850 million down to $500 million. Some analysts have seen that fall as evidence that the company worked hard to get market share back, giving it some stability as we move in to 2013. But the bigger question is how the new sales figures are going to affect a potential buyout from Richard Schulze.
Best Buy's founder has been lurking for a while now, and in early December it looked as if things were finally going to come to a head -- but Schulze didn't make a move. The new sales result could help or hurt Schulze's position, depending on how it's interpreted. On one hand, he may be able to attract more backers, since the company beat expectations and may have found some solid ground, thus helping to convince private investors that Best Buy still has a future. Even better than the headline number is that in the U.S., sales were flat. If the company goes private, it may seem like an easy solution to simply sell off the international segment.
On the other hand, cash is king. Schulze is going to have to either make his pitch stand on the one-time nature of the cash fall, or explain how cost savings and reorganization can increase the flow. If he thinks he can sell a turnaround, he's going to have to explain how Best Buy is going to avoid the squeeze that Amazon, Target, and Wal-Mart (NYSE:WMT) have already put on it. Considering that Target just introduced a price match with its major competitors, agreeing to meet both online and in-store prices, it may be a hard sell.
The bottom line for investors
No one watching this unfold could think that investing in Best Buy is risk-free. Right now, the price is swinging on the likelihood of a buyout, which is what investors should be hoping for. Going back to the football analogy, the real reason to get excited is not that you might win the conference -- that ship sailed long ago. Instead, you set the couch on fire, because with this win, the team shows that it might at least not lose to the college down the road. Small victories are still victories.
I think this all bodes well for Best Buy's buyout potential. While the cash situation is not to be overlooked, I think the domestic strength is a big bargaining chip and should make a buyout easier to sell. If that does happen, investors really only win if the price is near $25. Anything below that would be a small gain on any buy-in price over the past year, with the last quarter of 2012 being the exception. The problem is, $25 is a long, long way off. If you were to buy in today, you could still turn a tidy profit on a $20 buyout -- but that's no sure bet, either.