Best Buy Proves To Be A Strong Buying Proposition At Current Levels

Author's Avatar
May 10, 2015

In the last few years, the stock price of Best Buy Company Inc. (BBY, Financial) has displayed volatility which was completely out of sync with the broader markets. After hitting a multi-year low at the end of December 2012, the stock has moved upwards almost consistently and now trades at around $36 a share. But even this rise has been punctuated by wild moves, such as a single day fall of over 12% in January this year and a gain of almost 18% over 10 days in October last year. Should this volatility deter investors from purchasing this stock or is the fundamental story behind this company solid?

Management performance

With the financial crisis and the consequent tightening of discretionary consumer spending, electronics retailers were hard hit. To add to their woes, there was increasing competition from online retailers such as Amazon.com Inc. (AMZN, Financial). Brick-and-mortar retailers such as Best Buy, RadioShack (RSHCQ, Financial) and J C Penney Company Inc. (JCP, Financial) were all in trouble, and RadioShack eventually ended up filing for Chapter 11 bankruptcy earlier this year. Best Buy stock was on a downward spiral till the end of 2012 when the management was changed for not being able to tackle a changing market scenario.

The new team initiated a financial turnaround with ‘Renew Blue’, a program that has borne fruit. The company has cut its expenses and its earnings have increased. Slightly exceeding the target set for Renew Blue, Best Buy has already delivered $1.02 billion under this initiative and this figure should only go up in years to come.

New initiatives

Recognising the importance of online retail, Best Buy is focusing heavily on that aspect of its business alongside its brick-and-mortar stores, by ensuring an extensive catalogue of products on its online platform. For instance, new consumer-oriented 3D printers from 3D Systems Corporation (DDD, Financial) are available, starting this week, in 100 Best Buy stores and also on its website.

Best Buy is also extending its e-commerce platform to allow other retailers to use its website and physical stores for procuring and fulfilling their own orders for their own customers. An initiative under the ‘Marketplace’ section of its website, the company is trying this out in Canada, and hopes to start this service, as competition to established online marketplaces like Amazon, later this year.

In another technology-based move, Best Buy announced last month that it is accepting payments made through Apple Inc.’s (AAPL, Financial) Apple Pay for purchases made through its smartphone app, and will start accepting payments in its physical stores before the year is over. While Apple Pay and Google Inc.’s (GOOG, Financial) Google Wallet mobile payment methods are not wildly popular yet, especially for making payments at brick-and-mortar stores, it makes sense for the company to give its customers the option of paying through their preferred mode of payment.

Conclusion

The company has survived through severe weather where others have failed, and the management seems to be making the right decisions, keeping an eye on changing consumer behaviour. With the macro-economic scenario improving, in terms of an improving economy, better jobs data and the expected increase in consumer spending, electronics retail should see a pick-up too. All these factors taken together overcome any hesitation that past volatility may cause, and we recommend a BUY on this stock.