Best Buy’s stock (BBY) can be likened to the ocean, with waves building to heights before crashing down in the surf. Occasionally, there are calm waters, but in the past several years, BBY, the world’s largest consumer electronics retailer, has had choppy waters. Recently, BBY investors have been quick to reverse course, driving the stock price up over several months, then turning around to bury it with a quick and nasty free fall, just to start again. This volatility is not in sync with the overall market and begs the question: Why is BBY so volatile? The answer lies in both the nature of its industry and its management team.

Analysis of the BBY Stock Chart

Analyzing BBY’s stock chart leads to the conclusion that it is much more volatile than the overall market.

Best Buy 10 Year Performance

Source: Yahoo! Finance

Over the past 10 years, BBY’s volatility has been much higher than the S&P 500 and Nasdaq, although it did follow the general trend through November 2010 albeit with more noise. After November 2010, BBY moves off market trend, experiencing a significant downtrend until December 2012. It was soon followed by a pronounced and quick uptrend over the next 11 months. A steep drop in January 2014 of more than 12% was followed by a slow and steady climb almost back to the December 2013 high. And on a one-year basis, the volatility is even more evident.

Best Buy 1-Year Performance

Source: Yahoo! Finance

The following chart displays a few of the more pronounced stock changes to highlight the length of time and severity of the moves.

% Change

Date, # Days for Initial Move

% Change

Date, # Days for Reversal

5.4%

June, 2014, 5 days

-8.2%

July 2014, 11 days

11.5%

October 2014, 10 days

17.8%

October 2014, 10 days

8.9%

November 2014, 2 days

-9.6%

Nov-Dec 2014, 7 days

-12.7%

January 2015, 1 day

14.7%

February 2015, 10 days

Data sourced from Yahoo! Finance

So what changed fundamentally to make the market react so violently and cause BBY to deviate so profoundly from the market?

Fundamental Interpretation of the Volatility

In an interview with Bloomberg in 2011, BBY’s former CEO Brian Dunn described the market environment in which BBY operates. “[Consumer spending is] volatile and uncertain... The consumer is making very measured choices,” commented Dunn. These choices include the consumer’s decision on how and where to spend discretionary income. Not only does the electronic retailer face challenges related to the state of the economy since the products offered are discretionary purchases, it also faces intense competition from online retailers, such as Amazon.com (AMZN). 

BBY’s slow decline beginning in November 2010 was a result of its management’s failure to quickly re-position the company to aggressively maintain market share and thwart online competition, a trend that continued until the end of 2012, during which time former CEO Dunn was ousted. The slide ended when the new management team, lead by CEO Hubert Joly, stabilized and refocused the company, an effort called “Renew Blue.” This plan had several key initiatives to improve the business operations, including:

  • Improving cost structure by closing underperforming stores, as well as reducing sales and general expenses (SG&A) by cutting its workforce.
  • Driving revenues by increasing the attractiveness of its brick and mortar stores through programs with key vendors, as well as reorganizing and improving the store shopping experience.
  • Focusing on supply chain efficiencies by streamlining logistics and procurement.

Is Volatility Here to Stay?

Renew Blue efforts have positively impacted Best Buy's financial metrics. Operating margins for fiscal year 2015 (ended February 1, 2015) grew from 2.9% in 2014 to 3.7%. EBITDA grew by 15.5% over 2014, exemplifying the effectiveness of the cost cutting efforts. And free cash flow (FCF) grew by over 151% from the prior year. Despite these strong efforts that seem to have pointed the company in the right direction, investors continue to be wary that the company will be able to consistently deliver. In January 2015, the stock fell over 12% in one day as the company delivered cautious FY 2016 guidance. Investors continue to have a wait and see attitude due to the volatility that appears to stay until confidence grows in the management team.

Investor confidence can be measured by the level of short interest. In lock step with BBY’s volatility over the past five years is the level of short interest, underpinning investor confidence, or lack thereof, in the company. According to Bank of America research, in the first quarter 2010, short interest was at a low of 3.8%, but grew to over 11% one year later, continuing even further, to a whopping 20%, by the first quarter 2012. Since these incredible heights, short interest declined steadily until fourth quarter 2013 when it took a spike up, before starting its current slow decline.

The Bottom Line

BBY’s stock has been on a tumultuous ride over the past several years, starting with poor operations and a management team that failed to lead the company through changing industry dynamics. However, a recent upswing was based on fundamentals, characterized by a turnaround business plan led by its new management. The changes should help to further stabilize the business and produce improved returns. But while the transformation unfolds, volatility may continue, although hopefully at lower frequencies and durations. 

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