At Best Buy, the Story Keeps Getting Better - TheStreet

Best Buy

(BBY) - Get Report

is looking better and better to some people on Wall Street.

The consumer electronics business has been hit by a faltering economy and weak sales of personal computers. But earnings reports this week from industry leader Best Buy and No. 2

Circuit City

(CC) - Get Report

illustrate why analysts and investors continue to buy the Best Buy story, and why they believe its stock will outperform Circuit City's and the market.

"It's a bigger store, it's better lit, and it's a better one-stop-shopping experience," says Paul Rasplicka, who manages the $1.3 billion

AIM Capital Development

fund, of Best Buy. "Obviously, in a very tough environment they are doing well. Every time I go in their stores, they are busy." Rasplicka's fund began buying Best Buy shares this past spring in the $30 range and has ridden them all the way to Tuesday's close of $60.20.

Rasplicka and many sell-side analysts point to the company's financial management, its attractive stores and its superior merchandise. They say Best Buy has been surprisingly resilient amid the downturn in the economy and that earnings will take off once the economy improves. In addition, despite doubling this year, Best Buy shares hardly look expensive, observers say, trading at about 27 times this fiscal year's estimated earnings, and 23 times estimated fiscal 2003 earnings. Circuit City is even cheaper, reflecting its lack of appeal to investors, at about 19 times this year's projected earnings and 16 times estimated fiscal 2003 earnings.

Ethos, Logos, Pathos

While Circuit City recently announced plans for an

aggressive new marketing campaign, complete with a new logo, analysts have little faith the company can overtake Best Buy and its bigger, better-stocked and easier-to-navigate stores in the foreseeable future. And in a conference call Tuesday, Best Buy offered Wall Street what Circuit City couldn't: a little visibility, by backing previous guidance and saying it expected a rebound in same-store sales in the second half of the year.

Outperforming
Best Buy outpaces Circuit City this year...

...and over three years

"In a tough time, Best Buy is beating Circuit City at every turn," says Peter Benedict, an analyst at

CIBC World Markets

who covers both companies. (Benedict has a buy on Best Buy and a hold on Circuit City, and his firm doesn't have a banking relationship with either.)

Indeed, consider the numbers: While Best Buy's earnings

fell 24% from a year ago in the recently ended first quarter, Circuit City's profits plummeted 82%. Comparable-store sales, a key barometer of a retailer's health, declined 13% at Circuit City, while Best Buy saw its same-store sales decline 3.1%. And in key categories such as digital cameras and camcorders and DVD players, Best Buy is taking market share from Circuit City, say analysts and company executives.

"Best Buy is gaining market share during a difficult period," says Richard Zimmerman, an analyst at

Janney Montgomery Scott

who covers Best Buy but also closely watches Circuit City. He says Circuit City, which last year discontinued appliance sales, is in a transition mode and will have difficulty gaining lost ground against Best Buy, which has already completed some of the initiatives that its rival is in the midst of doing, such as remodeling stores. "Circuit City is kind of regrouping and rethinking its strategy," Zimmerman says. (Zimmerman rates Best Buy buy, and his firm has not done banking for the company.)

Blindfolds

Even more importantly, what the companies said in their respective conference calls demonstrate why Best Buy, based in Minneapolis, has become the investor favorite. Investors hate uncertainty, and Best Buy mollified them by predicting earnings for the full year would slightly exceed the current

Thomson Financial/First Call

consensus. Best Buy also said same-store sales would look better in the second half of 2001, making it virtually the only retailer to offer positive comments for the remainder of the year.

In contrast, this is what Alan McCollough, president and chief executive of Richmond, Va.-based Circuit City, told analysts and investors on its recent conference call: "The reason we are cautious about the future outlook is because we have seen such a variance in sales since last year's third quarter." He declined to give any financial guidance.

In one telling research report, one analyst refers to his full-year earnings projection for Circuit City as his "best guesstimate," hardly words to soothe weary investors. "We continue to regard it as exceedingly difficult to project ongoing earnings, as much will depend on the company's ability to successfully evolve a new store model that is both viable and provides a satisfactory return on the required incremental investment," wrote

Jefferies

analyst Donald Trott in a recent report that lowered his rating on Circuit City from buy to accumulate. (His firm does not have a banking relationship with the company.)

And that is a good reason for investors to hold off putting new money in Circuit City.