Best Buy Stock Rallies Into Shopping Season

Shares of Best Buy (NYSE:BBY) are running full bore into the ever important holiday shopping period.

After reporting better-than-expected same-store-sales in Q3, Best Buy’s stock rallied nearly 7%. The 2.2% revenue growth from stores open 14 months or more is one indication that this turnaround story is indeed working.

It’s been a wild ride for shareholders (full disclosure: I’ve held shares of Best Buy since 2013).

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It was just under a year ago that the stock was chopped down. The market punished the company for not having a breakout holiday sales period.

The hammer fell in January and the stock was pounded down from nearly $45 to $23 before the selling abated.

Despite the harsh fall I’ve maintained my conviction in Best Buy’s turnaround story. As I stated in January of this year, shareholders should be prepared to hold this stock for years, not months, to earn their reward.

The company’s turnaround strategy stresses operational improvements over growth. Such things as a new website, more refined supply-chain strategy (which includes returns) and store-in-store layouts are aimed at making Best Buy competitive in today’s consumer electronics market.

For the past year the faithful have held on with conviction that these operational improvements will do more than just cut over $1 billion in annual costs.

We’ve believed that they’ll position Best Buy as a legitimate competitor to Amazon (Nasdaq:AMZN), Walmart (NYSE:WMT), Costco (Nasdaq:COST), and all the other massive retailers out there.

This past quarter’s results are just one indication that Best Buy’s turnaround is indeed on track.

I mentioned earlier the 2.2% improvement in same-store sales. That’s the fastest quarterly growth since early 2010.

Even better, profit more than doubled to $107 million as revenue hit $9.38 billion. Earnings per diluted share rose 80% to $0.32. That result was $0.07 ahead of consensus.

The company’s profit margin isn’t going to win Best Buy any awards. In fact, gross margin of 22.7% actually fell modestly from 23.1% a year ago.

But in an “intense” promotional environment Best Buy appears to be gaining market share. Best Buy’s sales of consumer electronics grew. That’s something that didn’t happen across the entire industry, according to market research group NPD Group.

In Best Buy’s ever important online channel, sales were up by 22%. At just 7.5% of total U.S. sales, the online channel isn’t the main ticket here. But it’s certainly a critical one given the competition.

Another strategic move that appears to be working is Best Buy’s store-in-store format. This helped smartphone sales in particular.

Many investors and analysts – including some that work for Wyatt Research – thought Best Buy’s days were numbered and that the company would follow Circuit City into liquidation. Ultimately they may right. But I don’t think so.

I continue to think Best Buy’s best days lay ahead. In five years, this won’t look like the same company that limped into 2012 with Amazon beating it on the back.

Even if some aren’t overly impressed with the company’s 2.2% growth in the last quarter, they have to admit that the company is increasingly relevant today. That’s hard to argue as the brick and mortar retailer has one dimension that online-only competitors like Amazon can’t emulate – showrooms.

The reasons to window shop Best Buy then purchase elsewhere online are gone. The pricing is the same. The product is there. Just put it in the car and go home. Why wait?

There is a final reason for investors to consider Best Buy stock right now. Cash. The company is sitting on $1.42 billion in net cash.

That’s enough to give management the green light to buy back shares or increase the dividend. With a current yield of 2.2%, the stock is already paying a decent amount. Any decrease in share count through buybacks, or an increase to the dividend, will be well received by investors.

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Published by Wyatt Investment Research at