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Not long ago I said that Best Buy (NYSE: BBY) was headed for the scrap heap, alongside defunct Circuit City. I believed that consumers were going to abandon physical electronics storefronts because it was easy to go to one, shop around for the tangible item, hop on a smartphone and learn that you could get it cheaper from an online retailer. Then Best Buy would die.
Then a funny thing happened. I had lunch with a notable short-seller last summer and I asked about shorting Best Buy. I knew the company’s cash and cash flow position were still pretty solid, so it would be a while before the company folded, and didn’t want to short it too soon.
He shocked me with his answer. He said that Best Buy had managed to reinvent itself, by using the store-within-a-store concept. By charging third parties for rental space, where it could showcase its products and act as quasi-Genius Bars, it had saved itself from disaster.
Not So Dead
Best Buy’s earnings for the first quarter revealed that it beat estimates, so perhaps the company isn’t quite as dead as I thought.
Adjusted earnings from continuing operations were 37 cents a share, which wasn’t a large improvement over last year’s 35 cents, but it blew away estimates of 29 cents a share.
Best Buy’s total revenues were $8.56 billion, but that was down by 1%, because it hit some serious headwinds in Canada. It was forced to close about half of its stores, causing a 22% decline in revenue to $668 million. Even worse, the foreign currency impact was a whopping 1,000 basis points, or 10%.
Meanwhile, the all-important comparable-store sales rose a meager 0.6%, compared to a 1.8% decline last year, a slight improvement.
Best Buy moved into wireless phone installment-billing plans last year, and this has proven to also be a revenue driver. So while revenues grew domestically as a result, overall comps still fell 0.7%.
The story was much different online, where comps rose 5.3%, demonstrating that people trust Best Buy enough to buy merchandise online from the company.
As mentioned, the one thing that kept Best Buy alive before and during its turnaround has been its balance sheet. It carries $3.74 billion in cash and investments against only $1.22 billion of long-term debt, accruing interest at a manageable rate of about 6%.
Sustaining Its Turnaround
Things will continue to be bad in Canada, so the company is warnings of 30% revenue declines there and a small loss. On the domestic side, however, revenues are expected to be flat to slightly up.
What we’re seeing, then, is a company that is holding its own during a turnaround. Backing out its $7 in net cash per share, the stock trades at an effective price of $28. EPS growth is expected to be flat this year, increase about 10% next year, and 12% or so annualized thereafter. It pays a 2.5% dividend.
Therefore, we have a company trading at about 11 times this year’s earnings. If one ascribes 12% annualized growth going forward, then we might postulate that Best Buy is selling at a fair price.
Personally, I’m not crazy about the stock, even at this price. I think there’s a lot of work still be done, and I can find companies with growth rates of 12% or higher trading at a price/earnings-to-growth ratio of 1.0. I’ll pass for now.
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