Why Best Buy Stands Apart

The retailer's customer focus helps it shine while Circuit City stumbles.
Author:
Publish date:

Best Buy (BBY) - Get Report tends to do things a little differently.

Many of its corporate employees don't work fixed schedules. Some don't even come in to the office at all, and instead work from home, the local coffee shop or anywhere else they can complete their projects.

And on Best Buy's fourth-quarter conference call Wednesday morning, rather than harping on every financial detail, management spent a significant amount of time discussing its "customer-centric" philosophy and how it will help the company stand apart from other retailers in the consumer electronics space.

The attitude toward solving customers' problems -- as opposed to trying to figure out what product customers want, stocking it and then merely hoping someone comes in and buys it -- is designed to help Best Buy differentiate itself in the marketplace.

According to customer satisfaction surveys, the initiative appears to be working. Brian Dunn, president and chief operating officer, mentioned on the call that Best Buy's rating on the American Customer Satisfaction Index increased from 71 to 76 (out of 100) in 2006, which the executive said was an almost unprecedented jump. The index reading for competitor

Circuit City

(CC) - Get Report

fell from 70 to 69 during the same period.

The strength of this customer-focused approach shone through in Best Buy's fourth-quarter report Wednesday. While Circuit City and other competitors are closing stores and firing employees, Best Buy is posting impressive revenue, earnings and same-store sales growth.

In the fiscal fourth quarter, Best Buy grew earnings per share by 20% over the year-earlier period,

topping Wall Street estimates. Revenue increased 21%, and same-store sales rose 5.9%.

Circuit City, meanwhile,

reported a fourth-quarter loss amid impairment and restructuring charges. Even excluding the items, profitability declined sharply, net sales were up a paltry 1.2%, and comp sales slipped 0.5% (albeit off a tough comparison of 11.6% a year ago).

On Best Buy's call, management was asked if it "smelled blood in the water," considering the difficulties being experienced by others in the sector.

"We've got a lot of capital, we've got a lot of talent, we've got a lot of alliances ... and we've got market-share gains in every market that we're in," was the answer. "We intend to leverage all of that in this upcoming year."

The company has nearly $4 billion in cash and short-term investments, with just over $1 billion in long-term debt and liabilities. Look for Best Buy to continue to deploy capital this year to not only buy back shares but to make strategic acquisitions in new markets. Recently, the company has made smart transactions enabling it to expand into China and Canada.

Best Buy forecast fiscal 2008 earnings of $3.10 to $3.25 a share, in line with Wall Street's estimate of $3.18. Keep in mind, however, a couple of things that could affect the bottom line for the full year.

First, as competitors close stores, their inventory will be marked down drastically. That should hurt Best Buy's traffic and sales figures as buyers look for bargains elsewhere. Best Buy said it has taken the closings into consideration in their guidance, but if closings accelerate, the results could be more severe. In the long term, the competitors' moves will certainly help Best Buy, but near-term results could be dicier.

Second, Best Buy management said it expects a more stable promotional environment in the second half of the year. This past holiday season was marked by significant promotions by consumer electronics retailers. It's certainly possible that if there's less competition because of shuttered stores, Best Buy won't have to lean as heavily on promotions to get people in the door.

That said, it's difficult to imagine a less competitive environment. Just because the Circuit City down the street is closed, it doesn't mean that shoppers won't go to

Wal-Mart

(WMT) - Get Report

or

Amazon.com

(AMZN) - Get Report

looking for deals.

But that's where the customer-centric strategy comes full circle. If a shopper knows he's got a sales associate who actually helps meet his needs, or that he can go to Best Buy's Geek Squad for tech support, he'll come back.

As I

wrote yesterday, I believe that Best Buy is a good indicator of the broader health of consumer spending. The positive results indicate that the consumer is alive and well and that the housing slump/subprime problems aren't affecting too many shoppers' decisions to buy a flat-screen television or an MP3 player.

Best Buy delivered the way it was expected to -- solid top-line performance, with guidance in line with expectations. Gross margins were lower, but operating margin improved.

The stock recently was down 90 cents to $48.23 after the company's relatively cautious comments about fiscal 2008. I, however, continue to believe the shares will reach $60.

It won't be easy to achieve everything the company is setting out to do, but with talented management thinking in unconventional ways that are resonating with consumers, perhaps the best buy at Best Buy is its stock.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

click here

to send him an email.