Breakout

Best Buy Beats Estimates! ‘In Joly We Trust’ Says Prabhakar

Jeff Macke
Breakout

One day after Best Buy (BBY) founder Richard Schulze pulled his plans to make an offer for the chain the company posted results well ahead of Wall St estimates, sending the stock soaring in pre-market trading.

For the all important holiday quarter BBY posted adjusted EPS of $1.64 on $16.7b in revenue compared to expectations of $1.54 and $16.4b. CEO Hubert Joly was pleased with the results but cautioned that 2014 would be a "year of transition". To that end Best Buy will ramp up SG&A with special attention paid to revamping the on-line division.

While refusing to offer financial guidance Joly laid out 6 areas of focus for the company. Investors can use these as a way to gauge Best Buy's progress. These priorities are 1) grow on-line sales 2) improve multi-channel selling 3) increasing sales and profits per square foot 4) driving down costs in the supply chain 5) optimizing the real estate portfolio [most likely by closing stores] 6) reducing SG&A expenses [cutting HQ staff].

Author, analyst and friend of Breakout Hitha Prabhakar says Schulze not being able to fund a buyout is the best outcome for all concerned. In the attached video Prabharkar explains that there's no magic bullet for the troubled electronics retailer but Joly's Renew Blue strategy deserves a chance.

"At this point I would say 'in Joly we trust,'" Prabhakar says of Schulze. Joly is reducing headcount in the home office rather than stores, increasing training and has apparently succeeded in stopping the bleeding, if not restoring the chain to full health. It may not be enough to return Best Buy to its former glory, but the Joly plan is about the best choice of the known options.

In the mid-teens Best Buy is too expensive to earn a large enough premium for Schulze to get control at a decent price. The smart play is for Schulze to sit back and watch. He's got billions invested in the company already. If Joly's plan works, Schulze will get even richer. If Renew Blue is a flop, Schulze can swoop in at a lower price. A buyout at these prices is the highest risk play with a limited upside potential.

As for shareholders it depends on their time frame. The buy & hold set should be aware there's a decent chance the stock will take a hit on no offer but its unlikely to be catastrophic. "I think it's worth taking a hit on the stock just to see what they're about to do," is how Prabhakar puts it.

Short term trading types may just want to mosey on to other ideas. The animal spirits of the market took over the day to day fluctuations in BBY stock long ago. Taking long or short positions and hoping something goes your way is a recipe for losing money.

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