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Why Best Buy Could Be a Bargain


Company enters the holiday season with a lean balance sheet.

As one of the few freestanding electronic retailers left standing, I've found myself warming up to Best Buy (BBY) lately. This morning, the company released second-quarter results have further piqued my interest in the company.

The retailer missed earnings estimates as profits fell 22%. But total revenue rose 12%, boosted by the 170 new European stores it opened over the last year. And domestic sales increased 2% -- a solid figure in my mind as positive sales growth is pretty rare in the retail space these days.

More importantly though, inventory fell 6.1%, positioning the company to enter the holiday season with a lean balance sheet. And market share soared 2% as its formerly crippled rival Circuit City is no longer in operation and current competitors just don't offer as impressive of a selection of merchandise.

Despite increased traffic flow, the average ticket fell. This comes as no surprise as consumers simply don't have the funds to make larger purchases right now. The key point here, though, is that consumers are still going to Best Buy for their electronic needs. Sure -- they may not be making purchases as large as they once would have, but they're still going or switching to the big-box retailer when they need electronic goods.

This is important because it indicates that the Best Buy brand is still going strong. And why wouldn't it be? It's nearest retail outlets pale in comparison. Radio Shack (RSH) supplies a limited selection of what sometimes seems like archaic gadgets. And consider yourself lucky if you can even navigate your way to the electronics section of a Sears (SHLD) -- its stores are disorganized and cluttered.

In reality, the only competitor of Best Buy that puts up a real fight is Amazon (AMZN). The competition between the two for this year's holiday shopping season will undoubtedly be fierce as they duke it out for shoppers' limited holiday budgets. But there's something to be said for personal face-to-face service, and that's precisely Best Buy's competitive advantage.

So far, the company has done well at avoiding massive promotions; the gross margin was stable in comparison to last year. And management has successfully implemented expense control. I anticipate Best Buy gaining further market share during the holidays with Circuit City completely out of the picture. At less than 17 times earnings, I think Best Buy is a company to keep your eye on as we move closer to the most critical two months of the year for retailers.
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No positions in stocks mentioned.
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