Best Buy May Be the Next Home Depot (Update 2)

Updated from 3:31 p.m. to reflect CNBC report of J.C. Penney CEO firing and closing share prices.

NEW YORK ( TheStreet) -- As Best Buy ( BBY) continues to map out new strategies to increase its profitability and compete against specialized and online retail competitors like Apple ( AAPL) and Amazon ( AMZN), the junk-rated company is being compared to Home Depot ( HD), the home products retailer that recently hit a record high share price.

Credit Suisse analyst Gary Balter on Monday said in a client note that Best Buy's strategy is to become the consumer electronics version of Home Depot, which he believes carries a premium customer experience, driving above average profit margins.

Best Buy previously has previously been associated with the likes of Circuit City, its defunct big box electronics retail competitor, in addition to J.C. Penney ( JCP) and Sears Holdings ( SHLD), two nationwide retail basket cases that have seen their earnings plummet amid a lack of competitiveness and uncertain restructuring plans.

J.C. Penney said on Monday its chief executive Ron Johnson has stepped down and will be replaced by former CEO Mike Ullman. Johnson was brought to the retailer from Apple to help revive the company's stores and implement a new pricing strategy.

TheDeal reported on Friday that some of J.C. Penney's vendors have been tightening credit and private equity firms are circling the retailer, citing unnamed industry sources.

Comparisons with Home Depot instead of J.C. Penney may be early given the company's post-crisis earnings growth and Best Buy's losses in 2012 and the first quarter of 2013.

Still, Balter sees Best Buy's recent announcements such as a store-within-a-store partnership with Samsung and the company's growing importance to product sales by Apple ( AAPL) as reasons for optimism.

According to Balter, the Samsung partnership may boost Best Buy's service experience to electronics customers and help to eventually increase profit margins. If the combined service with Samsung increases customer traffic, it could help Best Buy win back leverage from suppliers such as Apple, boosting overall profits.

"Think of Home Depot, where consumers and pros treat HD's selection as the premier selection in the home improvement category... The value of that shelf space cannot be underestimated in this relationship. That is a primary reason why HD delivers double-digit margins," wrote Balter, who also cited AutoZone ( AZO) and Bed Bath & beyond ( BBBY) as similar premium retailers.

The Samsung partnership "is the first signal that vendors understand the value add that Best Buy can bring to the consumer purchasing process, something which to date has been undervalued by both suppliers and investors," according to Balter.

Were the Richfield, Min.,-based retailer to eventually be associated with a premium experience, it could pressure Apple to make store-in-store displays more supportive of Best Buy. Currently, Balter estimates Apple's space within Best Buy stores carries some of the retailer's lowest profit margins.

Best Buy shares traded higher by over 2% in Wednesday trading, closing at a 12-month high of $25.96. The shares were among the biggest gainers on the S&P 500 on Wednesday.

Samsung will open 500 Samsung store-within-a-store set-ups at Best Buy stores, starting in May and ending this summer.

According to Deutsche Bank analyst Mike Baker, the partnership will improve ties between Best Buy and Samsung, while improving the retailer's store space for the hot-selling smartphone, tablet, Chromebook and flat screen products Samsung offers.

That store-in-store concept differs from the one currently in place with Apple, which simply quarantines iPhone, iPad and iMac products to their own part of Best Buy retail outlets. Samsung, in contrast, is putting its own workers and marketing spending to its store concept at Best Buy, whereas consumers still have to go to an Apple store for a full experience.

Piper Jaffray analyst Peter J. Keith wrote in an April 4 research note that Samsung won't be paying rent as part of its agreement with Best Buy.

The comparison between Best Buy and Home Depot goes beyond profit margins and a service experience.

Best Buy's turnaround may be aided by a housing market recovery that has already drove Home Depot's post crisis earnings expectations and the company's recent record high share prices.

As real estate comes back to life and homeowners need to fill living rooms with requisite electronics such as flat screens for the first time since the housing bust, Best Buy may have a better shot at succeeding with novel store-in-store concepts than companies such as J.C. Penney.

A late March report from the Commerce Department showed new home sales in January and February had their biggest two-month gain since the fall of 2008.

As Best Buy rolls out its Samsung store-in-store concepts, watch for consumer reactions to prove whether newly appointed chief executive Hubert Joly can revive the company's profitability and cash flows.

Best Buy shares are the best performer in the S&P 500 with an over 120% 2013 gain, amid increased confidence in the company's turnaround strategy. Those stock price gains compare favorably to Home Depot, which is up over 13% year-to-date. Still, Best Buy shares have a long way to go.

While the company's shares are off roughly 40% over the past five years, Home Depot shares have gained over 140%.

For more on Best Buy's turnaround, see the company's false junk ratings foundation.

Also see why the company is increasingly finding new life after the company's founder Richard Schulze ended six months of takeover negotiations without a formal offer and returned to the company's board of directors as a "chairman emeritus."

-- Written by Antoine Gara in New York

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