Best Buy Is Playing to Win

Best Buy has seen stock appreciation of 225.5% in the past year. If you have been long the company over that time frame, then you might be popping some Dom Perignon as you read this. If so, congratulations. If not, then you might be wondering if the stock will see further gains ahead. That's unpredictable, but we can take a look at the company's recent strategy and how it might impact the underlying business given rising competition from and Wal-Mart Stores

Adjusting to industry trends
From 2010 to 2013, Best Buy's business, and its stock, suffered greatly. This was primarily due to online-retailing behemoth, Consumers wanted convenience, top-notch customer service, and value. Amazon offered all three, and it still does today. That's why Amazon is currently the top retailer when it comes to growth potential.

Best Buy also had to contend with the massive and powerful Wal-Mart Stores on the brick-and-mortar side, which began offering more in the form of electronics at its everyday low prices.

Between Amazon and Wal-Mart, it seemed as though Best Buy had no shot at survival. And I admit that I might have been wrong on this one. I thought Best Buy was heading for futility. While I wouldn't go bullish on Best Buy just yet, my bearish perspective is fading. That's because this is one of those rare cases where management has figured out a way to put itself ahead of industry trends.

This is often a daring move. If it fails, a retailer will go bankrupt. But Best Buy has proven that's it's not playing to lose. Rather, it's playing to win. Now let's remove the suspense and take a look at what Best Buy has done to improve its business as well as its future potential.

Most retailers feeling the onslaught of Amazon and Wal-Mart will back up against the ropes and continue to take the hits, hoping that industry trends will somehow reverse themselves so they can gather up enough strength to fight back. Unfortunately for these retailers, this doesn't happen. Best Buy has decided to take matters into its own hands, and it has punched back. This counter-punch won't really impact Amazon or Wal-Mart, but it will keep them from steamrolling Best Buy. 

Due to the ever-increasing presence of Amazon and the ominous presence of Wal-Mart, Best Buy had been facing pricing pressure for years. This led to margin contractions and weaker bottom lines. Best Buy is still struggling on the bottom line, but its game plan gives it potential going forward.

In order to compete with Amazon and Wal-Mart on price, Best Buy now offers a "Low Price Guarantee," which is a price-matching policy. Contrary to popular belief, this isn't a big growth driver. It's more about the perception by consumers that if they go to Best Buy, they will now receive great value. And this seems to be effective. But that's still not the biggest potential growth catalyst for Best Buy. 

Best Buy found a way to offer something that at least Amazon can't offer, which is showcasing. By offering Apple, Samsung, Windows, and now Google stores, consumers have an opportunity to touch, feel, and experience new technologies offered by these companies. And at least for the moment, this showcasing is exclusive to Best Buy.

Now Best Buy has technology giants on its side, wanting Best Buy to succeed because it helps their own companies; and since vendor feedback has so far been very good, it seems as though Best Buy's odds of a successful turnaround have significantly increased.

Underrated fiscal strength
Best Buy might be struggling to deliver consistent profits, but unlike most unprofitable retailers, it has generated positive operating cash flow in the past year, to the tune of $2.0 billion. On top of that, it sports a healthy balance sheet, with $2.2 billion in cash and short-term equivalents versus $1.7 billion in long-term debt. This fiscal strength will allow Best Buy to reinvest in its business without debt being a burden. 

The bottom line
As far as stock appreciation, it's unclear whether or not there might be more room to run. I know that's sitting on the fence, but I can't force a prediction. The only thing I can tell you is that Best Buy's underlying business has improved, and its strategy is ahead of industry trends, which is rare. The one risk is that Best Buy is still highly discretionary given its consumer-technology theme. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of 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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