Yahoo Finance The End of an Era for Best Buy
Seven years ago, the situation at consumer electronics retailer Best Buy (NYSE: BBY) was perilous. Comparable sales had declined for three straight years; gross margin was trending downward; profits had turned into losses; and former CEO Brian Dunn resigned following a personal conduct investigation. There was a real concern that Best Buy could follow in the footsteps of former rival Circuit City.
However, that didn't happen. Best Buy hired Hubert Joly, at the time the CEO of a major hospitality chain, to take the reins and save the company. He did exactly that. Joly cut prices to make Best Buy more competitive, slashed unnecessary costs while investing in customer-facing labor, sold off struggling international units, and built up the e-commerce business. The company's stores, once viewed as a liability in the age of online retail and "showrooming," became an asset. Customer service became Best Buy's competitive advantage.
Image source: Best Buy.
In fiscal 2019, comparable sales grew by nearly 5%, while adjusted earnings jumped more than 20% to $5.32 per share. The company had posted a loss in fiscal 2013.
Time for a change
After more than six years on the job and a successful turnaround under his belt, Joly is now stepping down to make way for new leadership. Best Buy announced Monday morning that Joly would transition into the newly created role of executive chairman of the board. Corie Barry, the current CFO and chief strategic transformation officer, was named to replace Joly as CEO, effective June 11.
After spearheading Best Buy's turnaround, Joly will now advise the new CEO and assume responsibilities related to government affairs, community relations, and leadership development. As part of the leadership change, current U.S. COO Mike Mohan will be promoted to president and COO. A new CFO has not yet been named.
Barry assumes the CEO role as Best Buy transitions from selling products to selling solutions. The company has long offered services through its Geek Squad unit, but it sees an opportunity to play a bigger role for its customers. In the press release announcing the leadership change, Barry said:
Today's technology and consumer landscape creates tremendous opportunities for Best Buy to further expand and deepen relationships with our customers and employees, while continuing to deliver shareholder value.
Best Buy has already made a big bet on services by shelling out $800 million last year for GreatCall, the company behind the Jitterbug smartphone. GreatCall sells devices and services for senior citizens, providing Best Buy with a recurring revenue stream and a growth opportunity as the U.S. ages. This fits in with the company's broader strategy of providing support, services, and advice to its customers.
Is the stock a buy?
Shares of Best Buy have soared since Joly took over, but the stock still trades for a reasonable price. Based on fiscal 2019 adjusted earnings, the price-to-earnings ratio sits right around 14.
However, the low-hanging fruit appears to be thoroughly picked at this point. Best Buy may be able to reduce costs further, but each extra dollar of savings will be much harder to find than the last. Best Buy is a much more efficient retailer now than it was seven years ago, and that makes further cost cuts challenging.
Best Buy is also still beholden to product cycles in consumer electronics. Weak iPhone sales could hurt the company this year, and an eventual downturn in TV sales is inevitable following an upgrade cycle to inexpensive 4K TVs. Console video games increasingly going digital is also a threat, although it's not nearly as big of a problem for Best Buy as it is for GameStop.
After years of rapid earnings growth driven by cost-cutting, the bottom line is unlikely to grow as fast in the coming years, even if the company's push into services is successful. And a potential recession in the next few years will certainly hurt sales and profits.
Add it all up, and buying Best Buy stock doesn't look like a bad idea, but it also doesn't look like a great idea at the current price. The stock looked like a better deal late last year, following a steep decline, but it's almost fully recovered since then.
At a lower price, Best Buy stock would be a buy. It's a great company that's holding its own as e-commerce disrupts the retail industry. At today's price, you can take it or leave it.
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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of GameStop and has the following options: short April 2019 $13 calls on GameStop. The Motley Fool has a disclosure policy.
