BBY: A Great Buy On Weakness

bby-best-buyShares of Best Buy (NYSE:BBY) are still a great buy, especially after getting slammed on Monday. After reporting Q3 results, the stock fell 11% to $38.80.
The media latched on to BBY management’s cautious words about the likely margin impact of competitive pricing over the upcoming Black Friday shopping rush.
I sent a note out to subscribers of my 100% Letter advisory stating that this is a buying opportunity. This focus on margin impact from competing with Wal-Mart (NYSE:WMT) and other discount retailers misses the real story.
Let’s step back for a second here. BBY is in the beginning stages of a massive turnaround and rebranding effort. It is back on track to greatness in part because it’s repositioning itself as price-competitive.
Here’s the quote from the conference call that the media jumped all over (CFO Sharon McCollam speaking):
“So if our competition is, in fact, more promotional in the fourth quarter, we will be too, and that will have a negative impact on our gross margin … And in light of our competitors’ decisions to open early for Black Friday, we too are opening our stores early. This requires increased promotional offers and an incremental investment in store payroll.”
So what’s the expected impact from competitive pricing on Q4 gross margin? I estimate it to be around 0.2% to 0.3% — not a big deal in my opinion.
What would be a big deal to me is if Best Buy management said the company was not going to aggressively match the competition on pricing. After all, this comment would fly in the face of all the goodwill they’ve created with price guarantees.

Why BBY is a Buy

Instead, BBY management is doing the right thing.  The company is fighting for each and every consumer, and it is fighting the battle on many fronts:  price, convenience, e-commerce, service and product variety.
In order to win, BBY has to be a major player this holiday season.  It needs to get consumers through the door. It has to keep momentum going. If the company botches it because it stubbornly believes that it offers enough value to price above the competition, then the turnaround story gets murky. We’d no longer be convinced that BBY is fighting to gain the hearts and wallets of consumers.
In my mind a short-term negative impact on margins (that was somewhat expected anyway) isn’t the story here. The story is that BBY is battling to be a relevant retailer of consumer electronics and appliances that is at least as good as Wal-Mart, Amazon (NASDAQ:AMZN), Target (NYSE:TGT) and Costco (NASDAQ:COST). And that the business is healthy enough to compete on price.
These are good things, not bad things.
Best Buy has to compete on price. This is not a high-margin gig. It’s about efficiency, repeat customers and relevancy. That’s what BBY is after, and it’s the right call.
The positive catalysts behind BBY are still tracking in the right direction. The turnaround story is gathering momentum. Cool companies still want their products to be displayed in Best Buy stores. The revamped store layouts are great. The company’s online presence is growing. And cost savings are bigger than planned; BBY has saved over $500 million annually, 70% toward its annual goal of $725 million.
In Q3 BBY beat expectations on earnings, delivering EPS of $0.18, a full $0.05 ahead of consensus. That beat is just one small step toward significant profit growth in the years ahead.
The takeaway here is that you should buy the stock on weakness if you don’t yet own it. And if you want as good a deal as you’re likely to get on consumer electronics and appliances next week, well, head over to Best Buy.


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