Best Buy Delivers, But …

In this market, everyone wants to know, “what have you done for me lately?” The latest victim of this myopic mentality is home electronics and furnishings retailer, and Personal Finance Growth Portfolio holding, Best Buy (BBY). Best Buy released quarterly earnings Tuesday that delivered numbers well above Wall Street analysts’ estimates, but its share price dropped because it said the current quarter won’t be as good.

On an adjusted basis—excluding one-time gains and losses—earnings netted out at 44 cents per share, compared to the consensus estimate of 35 cents. But the company also said that the current quarter won’t meet its original estimate of 50 cents. Instead, the company is now predicting a range of 38 to 42 cents.

The latest report marked the fourteenth consecutive quarter that Best Buy beat Wall Street’s expectations. You might think that level of sustained performance would buy the company a break, but especially with everyone on pins and needles over the fragile global economy, it only takes a whiff of bad news to undermine a solid track record.

And in addition to the earnings downgrade, there’s the impending resignation of the company’s CFO, Sharon McCollam, which has been linked by some to the downgrade. However, McCollam was lured out of retirement four years ago (from Williams Sonoma) to revitalize Best Buy’s retail operations,  and she has been grooming her successor, a 16-year employee of Best Buy, over the past year to ensure a smooth transition. The resignation and the downgrade are likely a coincidence.

As I discuss in the upcoming issue of Personal Finance, sometimes we try to read too much into a story. Best Buy is simply a company in transition that is trying to coordinate declining revenues from its traditional consumer electronics business with rising sales in its service, warranty and appliances divisions. It’s a tricky balancing act, and every once in a while the timing doesn’t synch up perfectly.

Unfortunately for Best Buy, that explanation isn’t good enough for a financial world increasingly addicted to predictable data. It’s all about the numbers now, which are immediately plugged into valuation models that ignore context. Somewhat perversely, companies that don’t generate a profit at all get to play by a different set of rules that measure ambiguous metrics, but once a company becomes consistently profitable all that matters  is the next quarter’s earnings report.  

There was a time not long ago when equal emphasis was placed on more subjective elements, such as the senior management team’s long term track record (which in Best Buy’s case is good) and its relationship with customers. In that regard, Best Buy is fighting with online retailing giant to retain the loyalty of its longtime customers, a challenge which has become more urgent now that Amazon promises same day delivery to most major metropolitan areas in the U.S.

Unlike Amazon, which operates out of a small number of enormous warehouses strategically located near large population centers, your local Best Buy store sometimes won’t have your item in stock.  In response, outgoing CFO McCollam is credited for championing Best Buy’s “ship-from-store” program, which connects customers to inventory at all nearby stores to ensure instant gratification.

While Best Buy may slip a quarter, my IDEAL Stock Rating System tells me it pays a solid dividend (current yield: 3.4%), is growing its operating cash flow at a healthy clip, and is priced at only 10 times forward earnings. The company may not always deliver the instant financial results so many people crave, but for those with patience, it’s still a good buy.

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