4 Reasons to Believe in This Retailer's Recovery
It wasn't long ago that many people believed that Best Buy was headed the way of Circuit City. In the last few quarters, though, the company seems to have turned a corner. Long-term investors should know that there are a few reasons to believe this run is just getting started.
Amazon is big, but two bigger backers are supporting Best Buy
The first reason to believe in Best Buy's recovery has to do with who is backing the company. Some articles about Best Buy would suggest that Amazon.com is killing the company's business. Between Amazon trying to outgun Best Buy on pricing and Wal-Mart offering more convenience with nearly four times the locations, Best Buy is caught between two 800-pound gorillas.
The difference between Circuit City and Best Buy's business is that everyone knew that Best Buy would step in if Circuit City disappeared. While technically Amazon, Wal-Mart, and others could step in if Best Buy disappeared, several large companies realized this wouldn't be in their best interests.
Best Buy is essentially the last big electronics-focused retailer, and both Microsoft and Samsung have put their money behind keeping the retailer in business. With both Samsung Experience stores and Windows Stores now in hundreds of Best Buy locations, these behemoths are making sure that their products have prime exposure, but they are also providing expert staff to Best Buy as well.
Online sales -- really!
A second reason to trust in Best Buy's recovery is that the company is showing consistent strength in online sales. Over the last year, the retailer has reported at least 10% online sales growth. Given the company's same-store sales challenges, this shows that customers find the company's pricing competitive enough to make online purchases.
While Amazon reported a 22% increase in sales last quarter and Wal-Mart is trying to drum up its online sales, the fact that Best Buy is competing effectively should give doubters pause. With Best Buy offering to match competitors' prices, the idea that other stores are cheaper may not be as much of an issue as it was in the past.
Building on strengths and "optimizing" sales
One of Best Buy's "Renew Blue" initiatives is to "increase marketing costs to support growth in the mobile category." Since mobile is a category that is insulated from online competition, this makes perfect sense.
One advantage that physical retailers have over their online-only counterparts is that customers can't try out mobile phones online. Since the feel, usability, size, and weight of cell phones are key factors in the purchasing decision, Best Buy is in perfect position to take market share in this category.
In the last four quarters, Best Buy reported positive domestic same-store sales in this category. Just take a look at the difference between same-store sales in the "computing and mobile phones" category versus the company's overall same-store sales in the last four quarters.
Overall same-store sales
Domestic computing and mobile phones same-store sales
Not only are Best Buy's overall same-store sales improving, but this all-important category is consistently showing growth.
A key difference between Best Buy and Wal-Mart or Amazon is that the companies' key businesses are totally different. Best Buy gets almost 50% of its domestic sales from computing and mobile phone sales. By comparison, Wal-Mart gets 55% of its sales from grocery-related items, and Amazon gets more than 65% of its sales from electronics and general merchandise. Amazon and Wal-Mart both sell mobile phones and cellular service, but neither has the focus on the category that Best Buy does.
A rising bottom line
Analysts following Best Buy have been positively surprised in three of the last four quarters. Estimates have increased by almost 10% for fiscal 2014 and by more than 12% for fiscal 2015.
This is another key difference between Best Buy and its two large competitors. Amazon's estimates have come down by more than 10% for each of the next two years, and Wal-Mart's estimates have declined by just over 1% in the same time frame.
While Best Buy's rising estimates are one thing, these higher estimates are more believable because Best Buy has improved its operating margin significantly in the last year. At the end of 2012, the company barely managed a positive margin. By the 2013 quarter ending in August, however, the company's operating margin was 4.4%.
Considering that Amazon is still struggling to maintain a positive margin and Best Buy is creeping up on Wal-Mart's margin of nearly 6%, doubters need to realize that this story is getting better and better.
With better margins, improvements in same-store sales, and consistent online sales growth, Best Buy's recovery looks real. Doubters need to look at the real numbers being reported by the retailer, as this company should continue to surprise.
Another recovery to believe in
With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!
The article 4 Reasons to Believe in This Retailer's Recovery originally appeared on Fool.com.Fool contributor Chad Henage owns shares of Microsoft. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and Microsoft. 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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