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Best Buy's Not Dead But It's Far From Thriving

NEW YORK ( TheStreet) -- Corporate turnarounds are never easy. I was never in the camp of those who thought beleaguered retail giant Best Buy (BBY - Get Report) could escape the grasp of Amazon (AMZN).

Amazon has been stealing customers away through its online ecommerce platform, while Best Buy's margins were being squeezed on the ground by, among others, Wal-Mart (WMT).

The company's founder and largest shareholder, Richard Schulze, had seen enough and offered to take the company private last year for about $24 to $26 per share. At the time, shares of Best Buy were trading for a fraction of where they are today. At the time, I felt that this was a deal that shareholders couldn't pass up.

Well, what a difference seven months makes. Since reaching the $11.25 low of last November, the stock is up 150%. Not only does Best Buy appear to have new life, but the Samsung partnership, which introduced the "store-within-a store" concept to help Samsung combat Apple's (AAPL) retail advantage, seems to have added an extra layer of relevance to the once-struggling big box chain.

However, I wouldn't get carried away here.

While signs are pointing upward for Best Buy, I caution investors about getting ahead of themselves and repeat past mistakes of expecting too much. Granted, the most recent quarter was modestly improved but there was still plenty of bad news, including a 10% year-over-year revenue decline and a 1.3% drop in same-store sales. These are not quick-fix metrics.

Elsewhere, it doesn't seem as if Best Buy's management has figured out ways to keep Amazon and Wal-Mart from picking off its electronics business, which was down roughly 12% this quarter despite improvements in merchandising and showroom advancement. Although areas such as appliances and phones posted growth of 12% and 8%, respectively, these were negated by a 17% decline in entertainment.

I really want to like Best Buy again, especially after seeing all of these efforts. Plus I've been wrong in the past. But the eroding margins are still discouraging. Gross margin shed 180 basis points while operating margin declined by 70 basis points to 1.8%. Although this was still enough to beat estimates, the 36% decline in operating income still stood out like a sore thumb.
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