Note: The comparisons with JCPenney (JCP, Financial) are merely to show how Best Buy (BBY, Financial) has managed to turn things around as compared to JCP. So it’s not about comparing products, it’s about how Best Buy has managed to weather the storm.
The shift towards online retail platforms caught some of the world’s largest retailers by surprise. At first, people believed that there was no way the online store was going to take over from physical stores. However, over the last decade or so, things have changed and now, that dream is increasingly becoming a reality.
Amazon.com (AMZN, Financial) has grown to become the world’s largest online retailer, while eBay (EBAY, Financial) has managed to see off the challenge of up and coming social buying platforms, such as Groupon (GRPN, Financial), DealOn and HomeRun among others.
However, for companies that started traditionally as physical stores, the transition to online platforms has not been smooth, at least not without some major drawbacks. One of the biggest victims of this paradigm shift is JCPenney. This company has been struggling to turn things around over the last few years and has seen CEOs come and go without making any significant positive impact.
For JCPenney, the turnaround has been more like a mirage with different CEOs coming in with different mindsets for the way forward only for them to see those plans fail down the road. On the other hand, Best Buy, another retailer that struggled a few years ago seems to be finally getting its turnaround plan to work.
Shares of JCP have remained largely flat over the last 2½ years, while those of BBY have gained significantly. It is good to note that as from 2011 through 2012, both companies experienced massive declines, but while Best Buy has managed to recover significantly, JCPenney shareholders have had little to smile about.
In fact, shares of JCPenney continued to fall up until early 2014, when the price appeared to have stabilized at ridiculously low levels. Currently, JCP is down 54.23% over the last five years, as compared to 8% gain by BBY.
How Best Buy has managed to turn things around
In 2012, Hubert Joly resigned from his post as CEO of Carlson to take over a similar position at then a struggling Best Buy. He was charged with leading the company to what we now know as the path to recovery which features stringent austerity measures and cost cutting activities.
Best Buy has managed to cut on spending while at the same time bringing customers back to its stores. This has enabled it to almost match the change in earnings from one quarter to the other with the change witnessed in the top line.
The ability to turn revenue into profits is one of the good signs that a company looking to turn things around should be looking for. Best Buy has managed to do this, which makes it easier to move to the next stage of growing revenues. As depicted in the chart below, Best Buy has managed to keep earnings and revenues in tandem in terms of change, and at times, earnings have actually grown at a better rate than revenues.
On the other hand, JCPenney has showcased a near-consistent change in revenue from one quarter to the other while earnings have struggled to cope. This means that the company has not been managing its costs well, thereby leading to low profitability margins.
Looking at the chart above, JCP’s quarterly revenue is down nearly 50% from the same figure reported in 2011, and by about 30% from fiscal 2011, while net income has fallen by 151% on quarterly basis. On the other hand, BBY’s revenue is down by 28%, while net income has fallen by about 24% in the two comparable periods. Notably, Best Buy returned to profitability in fiscal 2014, and amanged to increase profits by a whopping 82% in fiscal 2015.
On a quarterly basis, BBY has managed to report positive net income change a couple of times in the last few quarters including 125% increase in Fiscal Q1 2016.
It is true that Best Buy faces a huge challenge in the frame of product pricing due to the increase in low-priced online products. However, the company has embraced this challenge, and while it still has a long way to go, investor sentiments seems to be pointing on the bright side, especially given the development shown over the last two years or so.
In the company’s most recent quarter, domestic revenue increased 3.9% from last year to $7.9 billion. But the most interesting figure to pick out here was the 17% increase in domestic online revenue, which the company attributed to increased traffic on its online platform. Domestic online revenue was $676 million, while the domestic gross profit margin increased to 24.7% up from 23.4% reported the same period last year.
In general, Best Buy Fiscal Q2 2016 results took analysts by surprise beating expectations on both revenue and earnings. The company reported earnings per share of $0.49 compared to analyst expectation of $0.34. Best Buy has outperformed analyst expectation on earnings for each of the last 10 quarters, which indicates the company’s improving performance.
This surprise is down to the company’s hard work towards providing advice and an enabling environment for its customers. The company remains positive and expects improvement in the coming quarters.
In Q2 conference call, CEO Joly said, "We believe these better-than-expected second quarter results are affirmation that our strategy of offering advice, service, and convenience at competitive prices is paying off.”
As far as the CEO is concerned, this is just the beginning of things to come. "As we look forward, while we are cognizant of the recent financial market turbulence, we believe the combination of an opportunity-rich environment and the strength of our competitive advantages leads us to have a positive outlook about our future prospects, starting with the important back-to-school third quarter," he added.
Is Best Buy a good buy now?
Now, following the company’s recent surge in price, many would be asking themselves this question. The simple answer is yes. This is because, despite the recent rise in price, the company is only up 8% in the last five years, and given the fact that it is still in the process of turning things around, the best is yet to come.
Additionally, Best Buy currently trades at just 14.14x in P/E; this suggests that it could still rally further if it continues to report growing profits. Furthermore, the 14.14 P/E is still below the Peter Lynch valuation chart line, which optimally values a stock at 15x in P/E. As such, traders looking for more reasons for optimism can evaluate the stock based on that.
Conclusion
What Best Buy has been doing over the last few years is focusing on people, and not the numbers. The company has worked hard to provide better services as well as learning the preferences of its customers. This is what has worked the magic that we now see in what was once viewed as a sinking ship.
Best Buy may still be on the mend with a lot of work yet to be done, but the signs are there that it is headed in the right direction and as such, struggling retailers like JCPenney could learn a few things about the turnaround plan.
