When “showrooming” became the buzz word that would describe the broken business model for Best Buy Co., Inc. (NYSE:BBY), it felt as if the end was near. Amazon.com, Inc. (NASDAQ:AMZN) and NewEgg were two of the e-tailers who benefited from Best Buy Co., Inc. (NYSE:BBY)’s inability to compete. Fixed commercial real estate costs and higher prices made it easy for e-tailers to grow their online sales quickly. It looked like Best Buy would not survive. Shares traded as low as $11.29 by the end of December 2012.
Since then, Best Buy shares are up nearly 45% in 2013, outperforming even Amazon.com, Inc. (NASDAQ:AMZN), whose shares have a forward P/E of over 70. Best Buy’s forward P/E is just 7. In the last three months, fellow traditional retailer Wal-Mart Stores, Inc. (NYSE:WMT) is flat:
(Chart Source: Kapitall.com)
There are a number of reasons Best Buy may have found its lows for the year.
1) Best Buy started price matching online retailers during the holidays last year. Analysts thought that this practice would hurt the company. Real estate costs would hurt profits, giving e-tailers an advantage. This assumption turned out to be wrong. Best Buy Co., Inc. (NYSE:BBY) reported quarterly earnings of $1.64 per share, beating analyst estimates by $0.11. Revenue in the previous quarter was $16.7 billion. Same-store sales grew 0.9% in the quarter. Price-matching was so effective that Best Buy will continue the practice.
2) The Amazon.com, Inc. (NASDAQ:AMZN) effect is over-rated. Amazon sells more than just electronic goods. Companies outside of the domain of electronics are being hurt even more. Investors still seem to believe Amazon has an advantage over bricks and mortar, assigning Amazon with a much higher P/E than that of Best Buy Co., Inc. (NYSE:BBY).
3) A privatization is still on the cards. The company was so undervalued that Best Buy turned down proposals from three private equity firms. The firms wanted to take a minority position valued at $1B in the retailer.
4) Advertising and capital spending are still effective. In the last quarter, Best Buy Co., Inc. (NYSE:BBY) ran sales promotions during the pre-Super Bowl season, which helped improve sales. In fiscal 2014, Best Buy will spend $700 million to $800 million for capital expenditures.
In contrast to Best Buy Co., Inc. (NYSE:BBY), Wal-Mart provided guidance that was light. In February 2013, sales were lighter than expected. Wal-Mart blamed tax refund delays as the reason why consumers spent less at stores. Despite a weak month, Wal-mart grew revenue by 6.9% to nearly $38B. The steady sales of Wal-Mart Stores, Inc. (NYSE:WMT) illustrate that Best Buy can still stay relevant in the bricks and mortar retail business. Online sales will continue to outgrow traditional retailing, but consumers still need to try goods at a physical store.
Bottom line
Much of the gains made in Best Buy has already been made, but Best Buy’s business has stabilized. The market will continue to reward shares with a higher multiple as talks of privatization continue throughout 2013. The electronics retailer is more attractive than Amazon.com, Inc. (NASDAQ:AMZN), due to excessive valuation of the latter. Wal-Mart is another investment option for investors who want exposure to retailing.
Wal-Mart Stores, Inc. (NYSE:WMT) increased its dividend to $1.88, up from $1.59 per share. This gives investors a yield of around 2.6%. Best Buy also pays a dividend that yields 4.1%. A combination of a likely turnaround and a higher dividend makes Best Buy a more attractive investment than Wal-Mart.
The article How This Retailer Got its Mojo Back, and Why There is More Upside originally appeared on Fool.com and is written by Chris Lau.
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