Faith in management, improved sales drive its recent stock surge.
Best Buy Co. continued its comeback tour on Wall Street Monday, with another analyst recommending that investors buy the stock.
Peter Keith, a New York-based analyst with Piper Jaffray, raised his rating to “buy,” joining nine or so other major analysts who have upgraded the stock over the past six weeks.
“What I’m really excited about is the presence of a real, sustainable, multiyear program” to not only cut costs but to grow sales and profit margins, Keith told the Star Tribune in a phone interview.
Best Buy now ranks as one of the year’s hottest stocks, a notion that seemed improbable for the Richfield-based retailer just a few months ago. Falling sales and management turmoil led some analysts and investors to question the company’s future. But under CEO Hubert Joly and his Renew Blue strategy, the company has stabilized its sales and cash flow and recently said that same-store sales in the fourth quarter rose 0.9 percent, its largest gain in three years.
“Bankruptcy is now off the table,” Keith said, citing that factor as the top push behind the stock.
But the retailer still faces plenty of skeptics. Of the 25 analysts tracked by Bloomberg who have rated the stock this year, most still recommend that investors hold the shares while a few rate the stock a sell. Best Buy shares are also far below 2010 levels when they traded near $50.
The company’s turnaround plan, however, has caused the stock to soar 80 percent since December and to close Monday at $20.09. Before the end of last week, the last time Best Buy stock reached $20 or more was last August.
Best Buy was cleared of a huge uncertainty late last month when it learned that founder Richard Schulze would not submit a bid for the company. With Schulze backing away, the company can focus on its comeback without the prospect of a divisive takeover and its leaders can implement their plans.
Indeed, investors’ renewed enthusiasm for Best Buy flows from Wall Street’s confidence in its new executives, notably Chief Financial Officer Sharon McCollam. A former top executive at Williams-Sonoma, McCollam already enjoyed a strong reputation with analysts, even if they didn’t necessarily think much of Best Buy’s prospects. As CFO and chief administrative officer, McCollam is overseeing an overhaul of the company’s inventory systems and ways to improve stores’ profits per square foot. She also will play a big role in the reinvention of BestBuy.com, which the company expects to roll out in fiscal 2014.
“There are investors who have bought shares just because she joined the company,” Keith said.
Wall Street thinks the plan offered by Joly and McCollam could significantly boost sales and profits without resorting to draconian cuts that often signals the beginning of the end for a distressed retailer.
Best Buy recently laid off 400 employees from its corporate headquarters, but the company made clear that it would not eliminate store employees, which Best Buy has already spent millions of dollars to retrain.
“Management realizes stores are a real asset,” Keith said.
Joly also outlined a plan to shift valuable square footage in stores away from low-margin items like CDs and DVDs toward more profitable categories such as smartphones, tablets, accessories and appliances. Joly recently told investors that Best Buy plans to open 18 to 25 Pacific Kitchen stores, a store-within-a-store concept, that sell mid- to high-end refrigerators, stoves and washing machines.
“While not a terribly complicated strategy, Best Buy is initially reducing space in declining businesses and increasing space in growth businesses,” wrote Daniel Binder, an analyst with Jefferies & Co., in a recent research report.
Taken together, Best Buy estimates such moves could generate about $1.7 billion in operating profit, which some analysts think the company can hit in three years.