The incredible run in Best Buy Co., Inc. (NYSE:BBY) shares over the last few months could be foolish optimism, or the belief that new CEO Hubert Joly has the skills to turn the situation around. But there could something more fundamental; with the US housing market rebounding, is Best Buy poised to bounce back?
Best Buy continues to face significant threats
Despite its recent rally, with shares nearly doubling in 2013, the threats to Best Buy’s business remain intact. In fact, the key factor supporting Best Buy’s shares in 2012 — the possibility of founder Richard Schulze taking the company private — has vanished.
Much of merchandize in a given Best Buy Co., Inc. (NYSE:BBY) store — video games, DVDs and music CDs — is increasingly going digital. Consumers seemingly still prefer to buy their electronics online, a trend that has hurt RadioShack Corporation (NYSE:RSH). And most ominously, tech giants like Microsoft Corporation (NASDAQ:MSFT) and potentially Google are opting to open their own retail stores, creating new brick and mortar competition.
So why is Best Buy rallying?
Housing data has been coming in better than expected recently, suggesting that the US housing market has finally turned the corner. The S&P/Case-Shiller House Price Index beat estimates Tuesday, and last week, data on building permits and housing starts also exceeded expectations.
Although Best Buy Co., Inc. (NYSE:BBY) is traditionally not seen as a housing play, a significant percentage of the company’s business is tied to housing.
Unlike the aforementioned RadioShack, Best Buy has dedicated departments for appliances including refrigerators, washers, dryers and ovens. And when it comes to most towns, the local Best Buy probably has a bigger selection of TVs than any other store.
In Best Buy’s last earnings release, the company cited appliances as one of its strongest growing sectors. As The Wall Street Journal noted last year, appliances were one of the few sales categories that increased for Best Buy Co., Inc. (NYSE:BBY) in 2012, and the company has been expanding its sale of appliances through a boutique-like shop within select Best Buy stores known as Pacific Sales.
Retailers as a housing play
State Street’s SPDR Homebuilders ETF (XHB) contains most of the major homebuilding-related stocks like PulteGroup, Inc. (NYSE:PHM), Toll Brothers Inc (NYSE:TOL), and D.R. Horton, Inc. (NYSE:DHI). However, the fund’s top holdings are ancillary plays on housing.
The fund’s single biggest holdings are Williams-Sonoma, Inc. (NYSE:WSM) and Bed Bath & Beyond Inc. (NASDAQ:BBBY), at 3.6% and 3.5% of the portfolio, respectively.
Williams-Sonoma is a high-end retailer that sells goods like furniture, home furnishings and kitchenware: the kind of goods consumers shopping for a new home might be inclined to purchase.
The retailer reported earnings last week, beating Wall Street expectations. On the subsequent earnings call, the company’s CEO emphasized Williams-Sonoma’s commitment to “turn houses into homes.”
Further, Williams-Sonoma plans to expand even more into the kitchen and houseware category with its “West Elm” market brand extension. Like Best Buy’s Pacific Sales, these will take on a shop within a shop model, although there will be a few standalone stores. Williams Sonoma (NYSE:WSM) plans to build West Elm into a billion dollar brand.
Bed Bath & Beyond occupies a similar niche to Williams-Sonoma, but is generally targeted to consumers with lesser incomes. Like Williams Sonoma, Bed Bath & Beyond sells kitchenware, furniture rugs and other housing-related items.
In 2012, the company acquired Cost Plus for roughly $500 million. Cost Plus is a competitor to Pier 1 Imports, which is also included in the SPDR Homebuilder. Analysts at Oppenheimer upgraded Bed Bath & Beyond last year on optimism for the housing sector.
As a secondary play on a housing rebound, both stocks make sense. Although consumers can shop there any time, sales at both stores should see a lift when the housing sector is performing well.
In particular, new households should generate some of the biggest demand for housing goods, as young adults, having used their parents’ furniture and kitchenware for years, must buy these items to go along with their new living quarters.
Freddie Mac’s chief economist (via RisMedia) believes that a million new households formed in 2013 will help drive housing demand. If true, that should translate into a lot of demand for home goods.
Best Buy as a housing play
So, given that Best Buy Co., Inc. (NYSE:BBY) is seeing increased demand for appliances, and is working to bolster its appliance strategy, the retailer could be seen as a secondary play on the growing housing market. After all, new homes need new appliances.
Granted, investors looking to play housing more directly should probably stick to a homebuilder stock or ETF. But that said, those who believe the company is headed for bankruptcy should consider that Best Buy sells goods other than standard consumer electronics.
The article Is Best Buy a Housing Play? originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
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