Best Buy Still Has a Long Way to Go

Best Buy
Not so fast, Best Buy (BBY).

Shares of the leading consumer electronics retailer initially slipped after posting quarterly results on Tuesday morning. The report doesn't seem so bad at first. Revenue was flat at $9.36 billion, in line with analyst estimates. Adjusted earnings more than quadrupled to 18 cents a share, blowing past Wall Street expectations of an adjusted profit of 11 cents a share.

However, the stock had soared 268 percent this year ahead of Tuesday's report. When you go through that kind of rally, expectations are naturally heightened. You need to blow away the market to keep those gains.

Still, Best Buy hasn't proven that it can be a big winner this holiday shopping season.

Comps and Circumstance

A bright spot in Best Buy's report is that same-store sales rose 1.7 percent for its domestic locations. But dig a little deeper and the numbers stop sounding quite so impressive.

For starters, Best Buy is one of the growing number of retailers that include their website sales when calculating comps. They simply take online sales -- and at Best Buy we're talking about an additional $68 million relative to last year -- and divide them over the number of established stores.

%VIRTUAL-article-sponsoredlinks%In short, Best Buy stores weren't that much busier during their fiscal third quarter. sales accounted for nearly half of the "same-store sales" improvement.

Same-store sales would still have been positive without the online boost -- and positive comps at the once struggling consumer electronics giant is newsworthy -- but that's only because same-store sales slipped 4 percent during the prior year's third quarter. In other words, the typical Best Buy store is still ringing up fewer sales than it did two years ago, when the stock was still much lower than it is today.

Oh, and that $0.18 a share adjust profit that seems so great now pales in comparison to the $0.47 a share that it earned during the same quarter in fiscal 2011.

Best Buy still has a long way to go, and it won't be easy to get there.

The Electric Slide

CEO Hubert Joly stepped into a horrendous situation last year. The previous CEO had just been let go after carrying on an inappropriate relationship with a co-worker, and shoppers were mostly just using Best Buy as a showroom to kick the tires of products before they bought them elsewhere for less.

Best Buy has tackled the showrooming problem by lowering prices, shaving its overhead and passing on a good chunk of those savings to its customers. However, even the $505 million in annualized savings that Best Buy has realized so far is unlikely to allow it to compete with (AMZN) and other online retailers that don't need to staff and maintain a local presence in every market they want to serve.

Analysts have come to embrace Best Buy. Just 4 percent of Wall Street pros had a "buy" or "outperform" rating on the stock a year ago, according to FactSet, a financial data firm. The bullish ranks now include 58 percent of analysts.

Best Buy shouldn't have a problem drumming up sales over the holidays. The Xbox One and PS4 will be in demand, and there isn't any kind of material discounting for them in cyberspace. If anything, those video game consoles will only get more expensive online as speculators take advantage of tight supply. The problem here is that Best Buy's unlikely to sell a lot of the high-margin products that prop up profitability. No one's buying physical media anymore, and forcing itself to match competitor prices will keep the markups honest elsewhere.

Best Buy is just getting started in the turnaround process, but it's going to take a long time before it's truly back to the retailing giant that it used to be.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of Try any of our newsletter services free for 30 days.
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