Best Buy (BBY) is crushing it this year. Shares are up almost 160% year to date. The company has its new CEO, Hubert Joly, to thank for the growth.
He has cut costs dramatically, which helped usher in the company’s first quarterly profit in a year.
But the question is: Will the momentum continue? Not all analysts are convinced.
One thing to keep in mind is that cost cutting – while great for a short-term earnings boost – can’t go on forever.
According to Morningstar’s R.J. Hottovy, “There were a lot of costs to be cut in Best Buy’s cost structure, and I think that the market is rewarding – has rewarded – the company for those efforts. But [the market] now has overshot that, and may be getting a little bit too optimistic.”
Of course, there are other things to consider here, too. Like the fact that consumers are increasingly making electronics purchases at discount stores like Wal-Mart (WMT) or online retailers like Amazon (AMZN).
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As Hottovy adds, Best Buy “still doesn’t have any inherent cost advantages over the likes of Amazon, Wal-Mart.”
Granted, Best Buy has been doing a better job with matching those rivals’ online prices. And the company is revamping its stores and website.
It’s also letting vendors like Samsung and Microsoft (MSFT) run their own boutiques within its stores. But even that could backfire, says Hottovy…
“I think the store-within-stores from Samsung and Microsoft are a nice touch for the time being and should provide a short-term lift in terms of sales, as well as profitability. But at the same time, you are also giving the companies like Samsung and Microsoft a blueprint of how they could build their own retail presence. So it comes as a bit of a double-edged sword and could potentially come back to hurt them in the long run.”