Breakout

Best Buy Survives…For Now

Breakout

On Friday, Best Buy (BBY) investors got another warning that the electronics chain may have a hard time sticking around long enough to close the deal on a buyout. Reporting preliminary results from the holiday season, Best Buy said sales remained relatively flat but reduced estimates for free cash flow in 2013 to somewhere around $500 million, 50% lower than the high end of what the company guided to at the end of October.

Best Buy blamed the cash-flow shortfall on vendors demanding earlier payment for goods. Cash-flow issues often mark the beginning of the end for troubled retailers. Retailers run on credit. They buy the goods then sell them and pay back the debts. This is referred to as a revolving line of credit. When vendors demand early payment it's because they don't think the company is good for the money later. As a result the retailer doesn't have money for day to day improvements, forced as they are to keep more cash on hand to buy goods.

Related: Best Buy-Out: The Numbers Don’t Add Up

In Best Buy's case cash flow is no small matter. The company is effectively biding its time as it waits for an offer from founder Richard Schulze and his buyout group. Best Buy has given Schulze a deadline of February 28th for making a bid but the truth is the company will take an offer whenever it gets it. The cash flow issue on top of Best Buy's other problems make it unlikely Schulze's Private Equity partners will make an offer anytime soon. The smart play is to wait instead for the company to fall into bankruptcy or at least further dis-repair.

Related: All Hope May Be Lost for Best Buy Shareholders

Hitha Prabhakar, author of "Black Market Billions" disagrees. To her it's about sales, and sales are "less bad" than expected. Analysts had expected holiday figures to come in down 2% year over year. Instead Best Buy posted flat results suggesting, at least to Prabhakar and some other analysts that the earnings in the fourth quarter will be better than what had been expected.

What's more, Prabhakar says Best Buy is seeing a pick up in sales in markets where Amazon (AMZN) has been forced to pay sales tax. The tax bump was a key driver in Amazon's ability to undercut rivals. Prabhakar and others think this marks the end of Amazon's unfair advantage and breaths new life into Best Buy's online sales efforts.

Related: Best Buy On Life Support: How Showrooming Can Save the Chain

So far on Friday the market agrees with Prabhakar and the rest of the bulls but there's a long way between here and sustainable existence.

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