Is This The "Best Buy" For Your Portfolio?

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Dec 19, 2014

Best Buy (BBY, Financial) is a technological product retailer, who mainly was suffering due to macroeconomic factors and overall weakness in consumer spending. Since people tend to cut down on their technological product spending first, when it comes to keeping a check on their budget, such retailers feel the pinch easily.

However, Best Buy finally managed to bring hope to the investors, when it reported a good quarter recently. Its third quarter numbers were ahead of the Street's expectations, sending its share price higher.

Deeper insights

Revenue for the quarter inched up to $9.38 billion as compared to $9.32 billion in the previous year. However, the analysts' estimate for the quarter was at $9.11 billion. The top line was driven by higher demand for its products which resulted in same store sales growth of 2.2%. This was higher than the estimate of a decline in comp sales of 2%.

It benefited from new products introduced during the quarter, which attracted customers. The introduction of iPhone 6 and technological advancements such as, ultra HD TVs and wearables, resulted in higher sales. However, sales of cell phones and tablets were less, partially offsetting the gains of gaming, TV, appliances and computers.

Sales in the U.S. were quite strong, driven by comp sales of 3.2%. Revenue from the region surged 2.3% to $7.99 billion, over last year. Also, online purchases picked up the pace and were up by 21.6%. However, International sales dropped 8.4% due to unfavorable currency effects and weakness in China.

The bottom line was also impressive. Earnings surged to $0.32 per share as against the bottom line of $0.18 per share in the prior year. This was higher than the estimate of $0.25 per share. The company saved $65 million during the quarter because of its Renew Blue Initiatives. The initiatives included efforts such as closing down stores, cutting jobs, and removing layers of management in order to compensate for slowing sales.

Further details

Best Buy faces competition from online retailers, such as Amazon (AMZN, Financial), since the online retailer provides lower prices, which attracts customers. On the other hand, Best Buy has large stores which make its prices unable to compete with the online giants.

However, there are various efforts made by the company which should help overcome competitive pressures. It plans to add food in its stores by partnering with the food and beverage retailer Starbucks (SBUX, Financial). Further, the holiday season should help the company grow due to measures such as improvement in the in-store experience of the customer and the use of better marketing messages. However, highly competitive and promotional environment will weigh on the bottom line.

Also, there was a supply chain disruption in the West Coast, which can affect sales. Other factors such as declining product prices due to higher promotions and increased cost of free shipping will hamper results to some extent.

Winding up

Best Buy can actually prove to be a good buy, given its efforts and the new products launched in the market. Also, the upcoming holiday season should bring in more customers to its stores. Furthermore, due to a decline in oil prices and the increase in income should increase the overall demand. Thus, this retailer looks like a good investment bet.