What You Haven't Heard About Best Buy

 | Nov 21, 2012 | 2:00 PM EST
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I am very disappointed by the discussion surrounding Best Buy's (BBY) quarterly results. It's one thing to beat up on a company that is already on the ground, but as an investor, you have to understand what's really going on. This is especially true seeing that the stock, believe it or not, has been called out as a deep-value play.

Let's get real. It's management hype (profit opportunities in services, store closures, online experience, and so on) versus reality (more dreadful results, a worrying cash burn rate). Counter to J.C. Penney (JCP), reality wins on earnings day.

The Only Things I Care About on Best Buy

  • In roughly three months, the business has reached a point where 2013 cash flow guidance must be slashed by more than $400 million. Digging into the balance sheet, it's clear that Best Buy has too much capital invested in inventory from the old regime, meaning a high probability for greater-than-expected discounting during the holiday season entering calendar 2013 in a more productive (or liquid) position. In other words, there's no margin bottom and, as a result, no bottom yet in the perceived balance-sheet risk (from a cash-flow perspective).
  • The severity of the earnings miss and cash evaporation suggests a bid by founder Richard Schulze deserves to be below $20 per share. Indeed, he and his advisors have played their hand well and are in a position to offer a "take it or die in the public markets" bid to new management and frustrated shareholders (especially frustrated after the largely meet-and-greet analyst day).
  • Best Buy is caught in a vicious circle of having to regrow comps (which comes despite very "easy" two-year comparisons) through price investments, and this will occur quicker than expenses can be reduced (noticeable de-leverage in the quarter). Investments in price to grow operating income may work for Wal-Mart (WMT), which sells high-velocity items, but when Best Buy seeks to unveil this initiative, it's cause for concern.
  • The focus on mobile and services is either not producing comps that could support the entire weight of the business (specific call out here is mobile) or are so far removed from achieving anything conveyed at analyst day (in this case, services) that it's laughable.
  • I believe that Best Buy will seek to exit its international operations, which continue to be a drag (it may have to be a private company with access to capital to make this happen). There is nothing in the quarter to hint at international bottoming in terms of sales and margins, and this coincides with the business appearing to be an afterthought at analyst day.

If you want to buy this stock, ask yourself this: "Am I doing enough homework to build watchlists, seeing as I am about to hit buy on a company that is bleeding cash and lacks any support by the market?"

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