Dueling Fools
Buy Buy or Bye Bye
May 12, 1999

The Bull Rebuttal
by Paul Larson ([email protected])

I wonder if Chris has ever heard of the old cliche that "Whatever doesn't kill you makes you stronger." I think this perfectly applies to Best Buy. Even the most ardent believer in Best Buy is likely to agree that late 1996 and early 1997 was a very tough time for the company when it got stuck holding the bag with a bunch of older computer inventory. Yes, the write-downs erased profitability that Christmas season, but the adversity was a wakeup call to the company.

I think it is plainly evident that Best Buy learned its lesson, especially when one looks at the company's vastly improved inventory turns. The company is watching its inventory like a hawk, and the improved efficiency has shown on Best Buy's bottom line. A tweaked product mix and subsequent higher margins hasn't hurt either. After all, nothing teaches a lesson better than a mistake.

Chris then goes on to bash Best Buy for not having the best website in the world. This comes as little surprise since the company did not even sell anything on the site a few months ago. Even Amazon was quite the Spartan site when it first got started. Best Buy's site is in its infancy and will undoubtedly get better as the company refines its online offering. Plus, few online companies have the type of free cash flow Best Buy does to fertilize and develop its site. Best Buy has proven that it can adapt in the bricks and mortar retail world, and I think it's a safe bet the company will improve itself over time on the Internet, too.

I'm as big a bull on electronic commerce as any, but the traditional world of retailing is not going to die anytime soon. Best Buy offers a convenience that the online world will never replicate. If I need that software, adapter for my DVD player, or toner for my printer now, it's off to Best Buy I run. If online sales were killing Best Buy you would think that same store sales would start to show some negative comparisons. Hopefully my initial argument showed that this just isn't the case.

A 15.3% revenue increase at existing locations last year doesn't exactly sound like e-commerce is harming the company just yet. Whatever chunk of the electronics pie the online retailers are taking from Best Buy, the company is obviously stealing from its weaker bricks and mortar competitors. Keep this in mind -- Best Buy grew its sales by $1.7 billion last year, more than double the total trailing sales of Amazon.

Chris then goes on with a weak attempt at showing why Best Buy is overvalued at today's prices. I think if he were to rerun the numbers it would show that it doesn't take too many more years of 25% growth before those "expensive" multiples start to shrink dramatically. I find it amusing that Chris argued in a recent Duel that he liked Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> at an earnings multiple that is roughly double that of Best Buy even though Best Buy is expected to post higher profit growth. Go figure.

Simply put, many of the bearish arguments ring hollow. Best Buy has plenty going for it, and few companies are better positioned to supply the digital future.

Next: The Bear Responds