Is Best Buy Really Finding Its Feet in an E-Commerce World?

By Motley Fool Staff Markets Fool.com

In this Market Foolery segment, host Chris Hill and Motley Fool Total Income's Ron Gross consider the state of the turnaround being engineered by consumer-electronics focused retailer Best Buy(NYSE: BBY). Yes, the company had its issues in the past, and no, Amazon.com(NASDAQ: AMZN) is not going anywhere, but somehow, Best Buy has found a business model that makes it more than an e-commerce showroom. And the arrival of tax refunds helped it, too.

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A full transcript follows the video.

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This video was recorded on May 25, 2017.

Chris Hill: Let's start with Best Buy. First-quarter profits up 33%. The stock is hitting an 11-year high today. And I thought, when I saw what Target did, particularly when you looked at Target's latest quarter, and what they were doing with electronics, which drove a lot of the good things in Target's latest quarter, I thought, Best Buy is probably going to put up some good numbers. I didn't think they were going to be this good.

Ron Gross: All day long, we talked about how Amazon is eating everyone's lunch, and retail is in trouble because of online, specifically Amazon. We use Best Buy as the poster child, and we constantly knock them down. Meanwhile, as you said, very stealthily, they have put together a business that has made most of us feel quite humble. That's why I love this business. One day you feel like a genius, the next day you feel like an idiot, and this is one of those days. Five years, the stock is up 206%. Of course, they had their struggles before that and during that. But they seem to have someone worked it out. Beat expectations after warning of weakness in March, which is interesting. So, in March, they thought things were weak, but then the quarter ended up OK. Maybe there's a little sandbagging going on there, or maybe things picked right up. The new Nintendo Switch, which I wasn't even really that familiar with, the new gaming system, they are saying, was really helpful. Mobile was strong for them as well. And consumers spending their tax refunds, is one of the reasons they're saying they got that big spike after the March warning.

Hill: So, that's the most interesting part of this statement from Best Buy and CEO Hubert Joly. I'm quoting directly here, "Improvement of overall sales trends due to the arrival of delayed federal tax refund checks." This is the exact opposite of what we heard earlier this week from AutoZone. Not to pick on AutoZone, other companies have talked about this. But now we know where people were going with their refund check.

Gross: [laughs] Not AutoZone.

Hill: Yes. The refund checks were delayed, that is a material thing that happened. But it wasn't that people were taking that money and stuffing it under their mattress. They were going to Best Buy.

Gross: They were going to Best Buy, or they were sitting at their computer and purchasing stuff from Best Buy, with online sales up 22%, again, versus the competition with the likes of Amazon. So, really interesting there. I do think they're benefiting from the bankruptcy of hhgregg. So, the appliance business, Best Buy will get a boost as hhgregg struggles and goes away. But, they're getting it done. $3 billion repurchase program remains in place. They continue to buy back stock. 2% dividend isn't too shabby. I'm not an owner, and I'm not even necessarily a buyer, but I do give them credit where credit is due.

Hill: In terms of the buyback, again, the stock is at an 11-year high. Is that the right move? And one of the reasons I ask that question is because there was a point in time when they were taking money and investing it in their physical locations, doing overhauls, and that was a smart move, because they realized it was not a great customer experience. And certainly the huge Best Buy that's just a couple of miles from our office, I watched that transformation, and once it was all done, I thought, this is right. It's kind of like with, once I saw what a Panera 2.0 looked like and I was able to observe how it worked.

Gross: Yeah, I get it. The last couple years have been the CEO doing two things -- cutting costs on one end, but investing in the stores on the other end, as you said, in terms of refurbishing. Now that they've got their legs under them, they're going to start to play offense a little more, and they have some expansion plans, which is actually going to cost money as well. So, you might see profits take a hit as a result of short-term profits. But, if they pay off, of course earnings will roll down the road. As you said, the stock, not as "cheap" as it once was. Cheap in quotes because at one point, we thought they were going bye-bye. But still, 14X only. Theoretically very cheap. Retail, in general, is trading at low multiples right now. So, what it's telling you is there's risk here, and this is by no means a certain story. But the stock, if the company keeps on producing the way it's producing, then the stock does still remain cheap. But, again, it's too uncertain for me, personally.

Chris Hill owns shares of Amazon. Ron Gross owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends AutoZone. The Motley Fool has a disclosure policy.