Is Best Buy in Danger?

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With shares of Best Buy Co. (NYSE:BBY) trading at around $21.91, is BBY an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Electronic retailers are dying. Consumers can now find everything from office supplies to electronics to furniture at online retailers like Amazon.com Inc. (NASDAQ:AMZN). Consumers can also find all of the above and more, including groceries, at Wal-Mart Stores Inc. (NYSE:WMT). In a world of time constraints, consumers want to tackle as many errands as possible in one location. Therefore, if someone can purchase groceries and electronics in the same trip, they will obviously choose Wal-Mart over Best Buy. In some cases, a consumer will do all their shopping at an online retailer. Of course, this excludes groceries. Does all this mean that Best Buy is a hopeless case, or is there potential going forward?

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Best Buy’s number one goal is to reduce costs. This can help for a significant amount of time, but what about the long haul? What about the top line? What will be done to accelerate growth? The goal should be to thrive, not just survive. In an economic environment where the consumer is weak and the competition is fierce, those looking to survive will die, and only those capable of thriving will survive.

Best Buy has changed its game plan. Best Buy stores will soon look more like Apple Inc. (NASDAQ:AAPL) stores than Best Buy stores. This is a popular trend at the moment, but if many retailers are hopping on this bandwagon, is it going to allow that retailer to stand out? No.

Best Buy has closed underperforming stores, which is a good start. It helps solve the current problem, but it doesn’t help establish a long-term solution. All that said, Best Buy recently beat expectations on revenue and earnings. This is a good sign. However, should a diluted EPS of -$1.21 really get investors excited? This was a significant improvement from a diluted EPS of -$4.60 a year earlier, but there is still a lot of ground to cover before reestablishing profitability. Fortunately, future estimates are strong. It will be interesting to see how it all plays out.

The chart below compares fundamentals for Best Buy, Amazon, and Wal-Mart. These three companies differ greatly in size. Best Buy has a market cap of $7.34 billion, Amazon has a market cap of $120.00 billion, and Wal-Mart has a market cap of $294.77 billion.

BBY

AMZN

WMT

Trailing   P/E

N/A

N/A

15.11

Forward   P/E

9.25

73.74

12.90

Profit   Margin

-0.98%

-0.06%

3.62%

ROE

-11.54%

-0.49%

22.42%

Operating   Cash Flow

$1.59 Billion

$4.18 Billion

 $25.59 Billion

Dividend   Yield

3.10%

N/A

2.50%

Short   Position

14.00%

N/A

2.00%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

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