* Best Buy shares touch new 52-week low this week
* Bulls say shares have reached bottom
* Bears fret over overhead costs, market share, TV sales
* Best Buy's larger stores potential "white elephants"
* Strong cash flow and valuation-investors
By Dhanya Skariachan and Liana B. Baker
NEW YORK, April 6 Investing in top U.S.
consumer electronics chain Best Buy (BBY.N) is not for the
faint of heart.
Best Buy's shares have lost about a third of their value
since November and touched a new 52-week low of $28.10 earlier
this week. The stock has been in free fall since March 24, when
Best Buy forecast a weaker-than-expected fiscal-year profit on
sluggish demand for televisions.
The retailer also reported its third straight quarter of
same-store sales declines as it lost bargain-hungry shoppers to
online retailer Amazon.com Inc (AMZN.O) and mass merchants
Target Corp (TGT.N) and Wal-Mart Stores Inc (WMT.N).
Best Buy has admitted that consumers are showing little
interest in newer technologies. Analysts also worry about its
oversized stores and high overhead costs.
Still, the company has steady cash flow and its shares
trade at 8.23 times forward earnings, smaller than the consumer
electronics sector average of 10.41.
A GOOD TIME TO BUY?
Many investors say the retailer's stock has hit a bottom.
"The pessimism about the company is overdone," said
Arnbjorn Ingimundarson, founder of Boston-based private
investment firm Vitki LLC. "While it can be dangerous to try to
pick a bottom, based on the last couple of days, it seems like
the shares may have found a floor, for now."
Some investors agreed.
"The stock is extraordinarily cheap and confidence in the
management strategy is at an extraordinary low," said Larry
Haverty, associate portfolio manager of Gabelli Global
Multimedia Trust, which owns 38,500 shares of Best Buy. "My
hope is that it's very close to a bottom. You very rarely see
retail stocks sell at this cheap a price."
There also have been no warning signs about the company's
"There is nothing really in recent numbers to show that the
profitability of the company is about to collapse. So basically
I just see it as a very enticing valuation," Ingimundarson
But some investors, like Harry Rady, senior portfolio
manager of San Diego-based Rady Asset Management, are waiting
for the retailer's shares to fall further before investing.
"At 25 bucks, Best Buy is a best buy," Rady said.
Other investors have stayed away because of the questions
surrounding Best Buy's long-term prospects.
"While Best Buy is looking more and more attractive every
day, we would still have questions of the long-term
fundamentals of that business, the size of the store, and how
to continue to manage the deflation we're seeing across their
products" said Matthew Lockridge, a buyside analyst at Westwood
Holdings Group, which does not own Best Buy shares.
Industry experts urged Best Buy to shrink larger, older
stores as many shoppers increasingly buy gadgets online.
"These (large format) stores were built for another era in
consumer electronics retailing." said Craig Johnson, president
of Customer Growth Partners."These stores, unless they are
radically reconfigured or shrunk, are white elephants."
"They either have to work out deals with the landlords to
get out of these 10 to 20-year leases and shrink the square
footage or they need to take that space and repurpose part of
it," Johnson said, suggesting options such as lending some
space to a complementary retailer or subleasing space to
carriers such as Verizon (VZ.N) and AT&T (T.N).
Best Buy made one step in this direction in February by
announcing plans to open more small format stores.
There has also been evidence of Best Buy losing market
share in the past two quarters. But predicting the store's
future might be harder, said Wedbush Securities analyst Michael
"We don't really know for sure whether they will continue
to lose share. It is probably prudent for most investors to
just avoid having to make that call and find something else to
invest in," Pachter said.
(Reporting by Dhanya Skariachan and Liana B. Baker; Editing
by Bernard Orr)