Don't Count Best Buy Out Just Yet

By Markets Fool.com

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Source: Best Buy website.

It's been a wild ride for retailer Best Buy . Shares of Best Buy fell from $45 per share to $11 per share between late 2010 and late 2012, and the stock proceeded to rally back to $44 per share over the following year. Unfortunately, Best Buy is back on a downtrend, as investors are once again questioning the company's growth trajectory.

It's true that Best Buy is facing its fair share of headwinds. The company still faces pressure from the "show-rooming" effect, in which customers walk into its stores to view products and ask questions of employees, only to walk out and buy those products online for a lower cost. And Best Buy continues to be challenged by deflationary pricing pressure for many consumer electronics, including televisions.

But here's why investors might be making a mistake by once again writing off Best Buy.

Give credit where it's due
Shares of Best Buy are down approximately 12% year to date, even though the company delivered a relatively strong earnings report in late May. Earnings from continuing operations clocked in at $0.37 per share last quarter, which easily topped analyst estimates of $0.29 per share, according to Thomson Reuters. Revenue declined 1% to $8.56 billion. Comparable-store sales, which measure sales at stores open at least one year, rose 0.6%, which also beat expectations by about 50 basis points.

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Still, investors haven't given the stock much love this year, presumably because Best Buy forecasts trouble ahead. The company expects revenue to be flat to only up slightly in the United States this year, and expects flat to slightly negative sales growth companywide.

But there are some promising developments that Fools shouldn't overlook. First is that Best Buy is benefiting from the continued smartphone boom -- and offers an attractive way for customers to pay for them. Best Buy said revenue growth in the United States was boosted by sales of mobile phones that are bundled with billing plans from telecommunications companies. Under this arrangement, customers can buy new phones for a low down payment and pay the remaining amount over time, along with their monthly bills.

In fact, at the time of its May 21 conference call, Best Buy management said the company is the only non-carrier retailer that offers these types of installment plans both online and in-store. According to management, Best Buy's installment plans added 1.3% to the company's comparable sales growth last quarter. Going forward, this should continue to be a very strong tailwind for Best Buy, as the company notes customer demand for installment billing continues to accelerate.

Next, Best Buy is moving forward in mobile. Last quarter, the company launched a new mobile app, which utilizes Apple Pay. The app is a much-needed move since management says customer traffic is increasingly coming from mobile devices. To that end, Best Buy has a new technology development center in Seattle devoted to boosting its e-commerce presence.

Best Buy can still reward patient investors
These initiatives will take time to gain traction. Given Best Buy's relatively soft outlook for the current quarter, investors shouldn't expect to see results in the short term. But more broadly, Best Buy is doing exactly what a retailer should do right now. Shifting focus toward e-commerce and innovative smartphone installment plans should work to the benefit of investors over the long term.

In the meantime, Best Buy pays investors a 2.5% dividend yield -- a nice reward to wait for the turnaround to take effect. And shares of Best Buy trade for just 9 times trailing earnings per share, which is a very attractive valuation. The S&P 500 Index is valued at about twice that multiple. Investors could be in for strong returns if Best Buy's strategic initiatives work out.

The article Don't Count Best Buy Out Just Yet originally appeared on Fool.com.

Bob Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.