Earnings spike boosts Best Buy shares

Shares of consumer electronics giant Best Buy soared 13 percent today to $34.80, more than triple their price when the swooning stock hit bottom in the days after Christmas.

Best Buy reported $266 million in net income, more than 20 times the $12 million in second-quarter earnings the company reported a year ago. That added to the growing confidence investors have in a company that many had once left for dead.

At the same time, revenue fell slightly, to $9.3 billion. But what really pleased Wall Street was that the retailer showed it could trim prices to compete with rivals such as Walmart and Amazon.com without gutting profits.

In an interview after the earnings report, CEO Hubert Joly said the company is determined not to lose customers because its prices are too high.

"Our goal is not to be 10 percent cheaper than the other guy, because we offer a superior customer experience," he said. "But we don't want price to be an obstacle. That's how we introduced the price-matching policy a few months ago. So, we won't be beat."

Best Buy has also been cutting prices throughout its stores, though it won't quantify how much. The company says its sticker prices are steadily approaching those of rivals who have offered lower prices.

Last November, only four percent of Wall Street analysts following the stock had a buy rating, as many questioned the company's survival. Today, nearly half of analysts following the company have a buy rating on Best Buy stock, according to information compiled by Bloomberg.

Joly has a ready quip for the doubters.

"People who thought we were dead were dead-wrong," he said.

Even against adversaries like Walmart and Amazon. Joly said, the company has a formula that's sustainable over the long term: "Broad assortment, advice, convenience, service -- at very competitive prices."

To help offset price reductions, Best Buy has cut costs by hundreds of millions of dollars. Those cuts have included several hundred job cuts at the company's Richfield headquarters.

The retailer also has been closing underperforming stores and revamping others, providing more in-store sales space for key vendors such as Samsung and Microsoft.

Best Buy has been upgrading its website, too, by improving search capabilities, working to provide more customer reviews of products and fill orders more quickly by shipping products from stores and warehouses.

Online sales rose 11 percent.

Sales at stores open at least 14 months slipped about 0.6 percent. But that was an improvement over recent declines of as much as five percent.

But declines in comparable store sales aren't good enough for the long term, warns Edward Jones retail analyst Brain Yarbrough.

"In the next year, they're going to have to start showing better comps," Yarbrough said. "But right now, they've definitely stopped the bleeding they had seen."

This past winter's doubts about the company's future grew in the wake of a leadership scandal and as founder Dick Schulze struggled to find financial partners to help him buy the company and take it private. Schulze failed to make a bid but made peace with the company.

Morningstar retail analyst R.J. Hottovy said Joly greatly aided the company by stabilizing its business and convincing getting Schulze -- the company's biggest shareholder -- to back his strategy and vision for Best Buy.

"That's why the market has been willing to give management the benefit of the doubt right now, in terms of their turn-around plan, with that soap opera being something in the past now," Hottovy said.

Hottovy said Best Buy seems to be finding the right balance of keeping prices low enough and still making a profit.

"It seems like it can reduce prices to remain competitive with players like Amazon, Walmart and Costco and still generate some profitability out of it," he said.

Hottovy said Best Buy has a profitable future, but he doubts it will be as profitable as Joly envisions. Hottovy expects the retailers' rivals will see to that by responding with price cuts of their own.

"A lot of Best Buy's rivals still have a number of levers they can pull to compete with Best Buy, whether it be more competitive pricing or changes to their membership structures," Hottovy said.

"You've also got a lot of key consumer electronics suppliers that are finding ways to take their products directly to consumers. And lastly, you have an environment, too, where it is going to remain price competitive over a much longer horizon."