Breakout

Best Buy: The Surprising Winner of the Smartphone War

Jeff Macke
Breakout

The top two performing stocks in the S&P 500 for 2013 are all about content. At subscription streaming company Netflix (NFLX), the bidding war for video program has forced the company to start producing its own shows. Netflix shares are up more than 200% year-to-date, at least in part thanks to the surprising quality of shows like House of Cards and a new season of Arrested Development.

As recently as last year Best Buy (BBY) had a different kind of content problem. The death of the DVD and decline of the PC left Best Buy struggling to fill its cavernous stores with attractive product. A year later Best Buy has added store-within-a-store partnerships with Microsoft (MSFT) and Samsung to its existing deal with Apple (AAPL). Once regarded as Best Buy's fatal weakness, the huge physical store base is proving to be the company's greatest strength.

"At the end of the day Best Buy is the only place you can come in and see all the different products and touch all the different products and get the customer service," says Anthony Chukumba, senior equity research analyst at BB&T.

Under CEO Hubert Joly Best Buy has flipped the script on so-called "showrooming," Where once the company saw nothing but a threat in customers coming to the stores to comparison shop, Best Buy has finally realized that every visit to a store is an opportunity to sell things rather than sit idly by while business walks out the door.

Having the vendors running showrooms within Best Buy stores is a way for the company to enhance customer service at no cost. In the conference call discussing second quarter results, Joly said customers love having a combination of company "blue shirts" roaming the store while Samsung, Apple or Microsoft experts handle the specifics. "They appreciate the opportunity to navigate the store and look at these different ecosystems," Joly stressed, "it's a wonderful experience to look at these various vendors."

That's all well and good, but if it doesn't trickle down to Best Buy's bottom line the company might as well be a landlord renting out space for cellphone kiosks. The idea of bringing people into the store is to get them to buy other stuff as well as play with the latest and greatest devices.

Joly takes pains to emphasize that it's early in the process for Best Buy. Improving comparable store sales and profitability will be the ultimate yardstick for measuring Best Buy's ability to capitalize on the smartphone wars. In terms of the sustainability of the huge gains for the stock, suffice it to say having vendors fight over the right to give you content is a lower-risk strategy than Netflix's build-it-yourself strategy.

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