Best Buy Delivers in December

This morning, Best Buy (BBY) reported its December same store sales (SSS) were down 4%, better than the consensus forecast (per Street Account) of a 5.3% decline for 4Q. The company also reaffirmed EPS guidance for the year at $3.20-$3.40, implying 4Q EPS of $1.76-$1.96 versus the consensus at $1.84. I continue to believe the sell off in BBY last month was overdone. While today's results may not sound strong on the surface, consider the following:

1) December's comparison was most difficult - Last December, the company posted an 8.2% SSS increase but then business slowed and the full 4Q SSS were up only 6.9%. Thus, unless trends slow in January and February, SSS will likely be even stronger for the full quarter than they were in December (which was already above consensus expectations).

2) Underlying sales trends improved - When looking at SSS on a multi-year stack basis to smooth out comparisons, December SSS improved to +3.9% from a 1.2% decline in 3Q on a two-year basis and to a 2.9% decline from a 5.6% decline on a three-year basis.

3) HHGregg's (HGG) disappointment made traders nervous - HHGregg reported disappointing 3Q sales (ending Dec. 31) yesterday and had to lower its EPS guidance. Most consumer electronics retailers traded down in sympathy on this news even though HHGregg was only reporting for a period investors should have already assumed was weak, given BBY's previous 3Q announcement (thru Nov. 27). BBY's report is, at the very least, a relief.

4) Domestic online revenue stronger - Online was up 13%, a nice acceleration from 3Q's 7% increase. 3Q had been a real disappointment given how strong online has been for many retailers this holiday season, so it is comforting to see BBY more in line with the industry now.

5) Stock priced to miss - Trading at only 4.2x estimated Earnings Before Interest Taxes and Depreciation (EBITDA) for fiscal 2011, BBY is very inexpensive compared to the average specialty retailer at 5.5x. Recent private equity acquisitions in retail have been between 6.8x and 8.6x [(GYMB) and (JCG)]. While I would not buy BBY or any stock solely on takeover speculation, I continue to believe there is a case for it as I wrote several months ago. At the very least, recent buyout activity reinforces there is significant long-term value in many retailers at today's prices.

With concerns that business at BBY would continue to slide in 4Q now looking incorrect, I think the focus will shift more to the potential for 2011. Sales and EPS comparisons will be significantly easier in 2011. Based on the Consumer Electronics Association forecasts, industry sales will accelerate to 15% growth this year. Best Buy should be aggressive buying back stock given its cash hoard and cash generating ability. Sector gloom should brighten as the economy continues to recover, which should support stock multiple expansion. In summary, it's about time to buy BBY.

Disclosure: I am long BBY, HGG.