Best Buy Defies Gravity Again

MaybeBest Buy isn't the next Circuit City. Shares of the consumer electronics retailer soared 13% yesterday after posting blowout quarterly results, and this morning it received an analyst upgrade.

Best Buy's fiscal second quarter was a head turner. Seeing revenue inch 1% higher since the prior year to hit $8.5 billion may not seem like much, but keep in mind that analysts were holding out for a 7% decline. Clocking in with adjusted earnings of $0.49 a share may not seem like a substantial improvement over the $0.42 a share it posted year earlier, but you know the drill: Wall Street was modeling a sharp decline in profitability.

Best Buy managed to defy the thick skepticism -- partly fueled by its own conservative guidance -- even with its international operations going the wrong way. Domestic stores experienced a 3.8% spike in comparable-store sales since last year's showing. That includes the benefit of another double-digit spike in online sales that are baked into the store-level comps, but it's still a surprisingly positive showing at the store level.

Wasn't Best Buy supposed to gradually fade away? Wasn't the digital revolution supposed to shift consumption away from physical CDs, DVDs, and video games, leaving Best Buy out in the cold in the migration process to direct delivery? Weren't smartphone-armed consumers getting too smart to fall for Best Buy pricing when cheaper options were available online through merchants that don't have to price in the high overhead of running actual stores?

All of this may be true, and presumably still in play. This could just be an anomaly. However, the strong second quarter showing should at least cast doubts on Best Buy's demise as a foregone conclusion. You did pick up on the improvement in margins, right? This isn't a company sacrificing markups for the sake of drumming up sales. Best Buy's combination of shrewd cost-cutting, shutting down weaker stores, and enhancing the shopper experience is winning.

Raymond James analyst Dan Wewer certainly seems to think so, upgrading the stock from market perform to strong buy on Wednesday morning. He's slapping a $40 price target on the shares, implying 21% of upside beyond Tuesday's double-digit pop.

Best Buy's guidance for the current quarter was cautious, but what else is new? The superstore chain has excelled at managing expectations so it can easily clear the bar. It hasn't even been close. Best Buy has beaten Wall Street's profit targets by 44%, 28%, 10%, and 36% over the past four quarters. Throw in a 2.8% yield to keep patient investors fed, and Best Buy is no longer looking like a company holding a Turn-O-Matic number stub at death's waiting room.

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