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Risk Reward Balances Best Buy

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We reiterate our long-term Neutral recommendation on Best Buy Co., Inc. (BBY - Free Report) with a target price of $28.00.

Why the Reiteration?

Best Buy is undergoing a turnaround program including a price match policy, multi-channel strategy, multi-year cost reduction program and closure of some big box stores. In the latest concluded quarter, the company lowered its cost by $175 million, in addition to $150 million reduced in the fourth quarter of fiscal 2013.

This helped the online and brick and mortar electronic retailer post better-than-expected first-quarter fiscal 2014 bottom-line results, wherein earnings of 32 cents a share surpassed the Zacks Consensus Estimate of 25 cents.

However, the year-over-year decline of 57.9% in earnings per share was disappointing. Total revenue also dropped 9.6% to $9,380 million, and fell short of the Zacks Consensus Estimate of $10,791 million. Moreover, the company’s margins and comparable-store sales exhibited a dismal performance.

Best Buy’s online sales performance remains a positive. Domestic online sales jumped 7.1% during the quarter. We believe that the company is leaving no stone unturned in wooing consumers and capturing incremental revenue, as evident from its strategic initiative of opening "Samsung Experience Shops" within its stores.

It also entered into a similar agreement with Microsoft Corp. (MSFT - Free Report) to roll out “Windows Store” across its 500 outlets in the U.S. with an additional 100 in Canada.

Best Buy had also entered into a contract to divest its 50% stake in Best Buy Europe to Carphone Warehouse Group, the joint venture partner in the same. The move would help this consumer electronic retailer to concentrate more on its U.S. operations, which has been facing stiff competition from industry bellwethers such as Wal-Mart Stores Inc. (WMT - Free Report) and Inc. (AMZN - Free Report) . We believe that the step to offload its stake in Best Buy Europe would augment its return on capital employed.

Despite these catalysts, management cautioned that second quarter gross profit and earnings would be weighed upon by competitive pricing and investments made in areas such as online, mobile, the multi-channel approach and refurbishment of its website ( functionality, which would not reap benefits before fiscal 2015.

Zacks Rank

The pros and cons embedded in the stock are also well reflected through the Zacks Rank. Best Buy currently carries a Zacks Rank #3 (Hold).

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