Is BestBuy still a buy

Sunday, October 20, 2013

Is BestBuy still a buy

Best Buy Inc. (NYSE:BBY) hasn't had a fabulous time for the past few years. Faced with growing competition from the online retailers like Amazon, Best Buy's revenues had been shrinking steadily, leading many to wonder if the company would be finally falling on its face. Since it specializes in electronic goods, it did not enjoy the benefits of diversification that Wal-Mart has, especially products, which shoppers would be trying out before buying. However, with the coming of Hubert Joly, matters have taken a different turn, and the company's stocks have been steadily rising. While this itself shows that Best Buy still has the potential, one needs to take a closer look at the company's current status and future possibilities before jumping onto the bandwagon.

Image credit: slena / 123RF Stock Photo

The change in fortunes of Best Buy

French executive Hubert Joly, who was earlier at the travel company Carlson, took up the task of scripting Best Buy's turnaround story. To this end, he first engaged in aggressive cost cutting, pruning down unproductive assets so the company could focus more on the core portfolios. Thereafter, he sought to amend the business model, making the retail chain more active and adapting it to the rapidly changing consumer electronics market.

The result is there for all to see – Best Buy's stocks have risen from a stunning depth of $11 (December 2012) to the current multi-year high of $48 (October 2013).

Challenges Facing Best Buy

Best Buy's business revolves around selling consumer electronics, which are today sold by a majority of the manufacturers themselves. Hence, while you can get any Sony Products or a Samsung Galaxy S4 from Best Buy, you can also get it directly from Samsung. In such a scenario, consumers seek discounts and deals which will add value to the money spent. Unfortunately for Best Buy, the retail chain has not been able to provide sufficient incentive to its customers to purchase products from it.

Making matters worse is the rapid rise of online retail giant Amazon, which has flourished on the growing demand for electronics and books. Indeed, Amazon's Kindle e-book reader has become an industry standard of sorts while it offers some of the best deals on electronics. It is true that Best Buy also retails online, but the latter's core operations remain its sprawling network of physical outlets.

The ultimate challenge facing Best Buy is perhaps the level of its customer service. As repeated surveys have shown, Best Buy's representatives consider hard selling of Best Buy products, including those which the consumer is not interested in, a greater priority than actually helping the customers. Considering that online retailer Amazon is reputed for its excellent customer service, Best Buy should seriously reorient its goals if it wants to remain in the market.

Best Buy's future prospects

Despite these negative points, however, Best Buy retains significant potential. Part of this comes from its extensive retail network, which is the largest electronics retail chain in the US. Coupled with aggressive cost cutting and modification of business plans, this bodes well for the future of the retail giant. Indeed, if it can address issues related to the consumer experience and competitive pricing, it can easily cash in on its market exposure to alter its current spurt in growth into a decent long-term growth rate. 

This optimism has been reflected by the analysts, 18 of whom have rated Best Buy as “Buy” while only three have given a “sell” rating.

However, one needs to keep in mind that while the long term prospects of the company may be encouraging, the current P/E ratio suggests that the markets have already factored in the growth to some extent. Providing more weight to this argument is the fact that many insiders, led by Hubert Joly himself, have recently sold shares, thus significantly reducing their stake in the company.

What should you do?

From the above analysis, it becomes clear that while there may be challenges up ahead, the company is currently going through a purple patch, which has led to its stock rising much faster than its actual earnings. While it is true that the company can be expected to continue growth at a decent rate, the markets may have already factored this in. As such, it would be prudent to invest in Best Buy if one is seeking steady medium to long-term dividends. However, if one is already holding Best Buy's stock, now would not be an inopportune time to lock in some profit.

Author: Aritra Mazumdar

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