What's Behind Best Buy's Resurgence?

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I'm a slow investor. Overly cautious is the more technical term, but, really, I just always wait too long. Last week, when Best Buy announced its second-quarter results, I looked back to see what'd I'd said about the business over the course of 2013. Basically, I said, "Things are looking good, but there's still a lot of risk" in about 15 different ways. Because of the risk, I never jumped in and so missed out on the 197% gain that the stock has had year to date. C'est la vie.

In the most recent quarter, global comparable sales were only down 0.6%, compared to last year. In addition to the relatively minor global fall, the company had an even smaller fall in the U.S. -- just 0.4%. That drove all sorts of increases down the income sheet, and now Best Buy looks like it really is in the midst of a comeback. How'd it do that?

The shifting sands of Best Buy
If you had to choose a phrase for Best Buy's recent work, you might choose "less bad." The company has focused on making itself a less wasteful machine. That's how it was able to turn a drop in revenue and comparable sales into a major increase in operating margin and earnings per share. The company has stopped the bleeding in some of its major product divisions, and has pushed hard on the more successful divisions.

Comparable sales in the consumer electronics department -- the second-largest division -- have been falling and they continue to do so, but the rate has slowed. Last year, comparable U.S. sales in the department fell 10.7%; this year, they were only down 5.5%. Some of that was due to a shift in the definition of e-readers, which are now classed with computers and phones, but a lot is simply from better selling. Meanwhile, comparable U.S. sales in company's largest division -- computers and phones -- are up 5.8%. In an even stronger move, appliance comparable sales grew 14.2%.

Where to go from here
Best Buy is still fighting both Amazon.com and a general weakness in the U.S. consumer market. The company's focus on appliances is part of its recognition that direct competition with Amazon might not be worth it. Appliances are heavy, hard to ship, and even harder to return. That's a perfect recipe for buying from an actual store, as opposed to online.

Amazon is dominating the content segment, though, and it's still showing up on Best Buy's income statement. Amazon's North American media revenue increased 16% year over year last quarter. That's a market that Best Buy has had to give up on. Sure, it's matching prices now, but, really, it's out of the game. Best Buy's future has to be in its mobile, appliance, and services divisions.

All three of those areas benefit from one-on-one personal interaction and from immediacy. Service, in particular, has a lot of room left to grow. Like many big software or hardware companies, Best Buy is just now seeing the value of providing a recurring service to customers. That kind of income could be the future of the business.

For now, I feel like I'm finally over the size of the risk that Best Buy presents. Of course, by now I've probably missed out on the biggest gains. If that's something you don't have an issue with, you might look deeper into the Best Buy turnaround to see if it's right for you.

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The article What's Behind Best Buy's Resurgence? originally appeared on Fool.com.

Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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