Perkins Plays Retail the Other Way with this Pair
September 30th, 2007 by 
CA Editors
Mark Perkins sends: Trying to pick a winner in today’s market can be a complicated task. Many things need to be considered and taken into account before making an investment decision. One of the most important of these factors is the competitive landscape - it cannot be ignored no matter how great an investment a stock looks. Let’s compare two electronics retailers, Best Buy (BBY) and Circuit City (CC).
Profitability:
BBY trades for just 16x trailing earnings and the price to earnings growth (PEG) is low at .98. Circuit City has been slow to grow revenues since 2004, and while profitable in 2005 and 2006 the company’s bottom line has now slipped into the red.
What Is Really Important:
One of the best indicators of a successful company is when management can grow shareholder equity year over year. Circuit City has had declining shareholder equity over the last 3 years while Best Buy has compounded shareholder equity at over 30% annually from 2003 to 2006.
Key Comparison:
Inventory Turns: Best Buy, 6.6; Circuit City, 5
ROE: Best Buy, 30%; Circuit City, -8.36%
The important thing to take away from this is Circiut City is taking longer to sell items on its shelves and hurting as a result due to its low inventory turnover.
Competitive Landscape:
Compared to its rivals like Circuit City and Radioshack, Best Buy is doing fantastic. When you are a retail company and your competitor fires its best and most loyal floor employees, you’re in a good spot. Best Buy was in this position earlier this year when Circuit City layed off thousands of its highest paid employees in an effort to reduce costs.
The Bottom Line:
Best Buy is better than its competition and is attractively priced. An argument against Best Buy says Walmart (WMT), Sam’s Club, and Costco have more buying power and can sell cheaper electronics. It is a valid point but it isn’t comparing grapefruit to grapefruit. Those stores aren’t one stop, all-your-electronics-needs destinations. Even if they have the lower prices on a handful of merchandise, Best Buy has competitive advantages like The Geek Squad and managements’ ability to change in response to customers’ needs. Management has proven to be innovative with personnel and adept at rewarding shareholders. Furthermore, they are putting Apple (AAPL) mini-stores in a handful of Best Buys. Best Buys valuation and future outlook are strong, and more importantly the competitive landscape has swayed in its favor. In conclusion, the smart investor’s choice is to go long Best Buy (BBY) and short Circuit City (CC).
Subscribe to our feed:
See more Uncategorized | 
September 30th, 2007 at 9:24 am
One should listen to this and wonder why BBY does not carry Olevia brand,,they need to!
http://www.wallst.net/audio/audio.asp?ti...
Notes
Specifically mentions Best Buy as a company that needs to follow SBs
business model to compete with the Costcos of the world.
Expects 150% growth over next two quarters
Will finance growth by raising working capital (referenced benefits of
product and reliability) thru high demand. Was originally financed
thru receivable borrowing and now are looking for a debt offering from
a bank. Mentioned that there were a few that had shown interest
already.
$200 Million revenue drop going forward was taken from China
Expects to move from 1 1/2 to 2% market share up to 5% in the next 2
years…~250% growth. Will achieve by borrowing against China and debt
offerings.
Mentioned street reacted to SBs trouble with handling the growth
effectively. Shoring up of internal and forecasting controls should be
in place with recent hirings.
Much of this is rehash of CC but the key take-away I find is that he
is forecasting in this soundbit that they expect a 250% growth rate
for teh next two years so that leaves two options to hit that. Either
grow at the 100-150% they have recently forecasted for a couple of
quarters and then 300% for subsequent quarters or grow at 250% for
every quarter going forward and smach the Wall Street guidance from
the CC.
Knowing that he has a distaste for the shorting that has occured with
regards to this stock I suspect it is the latter. At the very least
(again, if he hits the targets mentioned here) there will be
astounding growth no more than 2 quarters out.
If I were short this would make me a bit nervous. What happens when he
drops the hammer saying that financing thru (insert bank of choice)
has been received to finance growth?
Longs-be prepared to ride a rollercoaster for at least a qtr or get
out
Shorts-keep an eye on it or get out