by Pauline

Created on: March 04, 2009   Last Updated: March 10, 2009

Best Buy (BB) is now the last man standing, enjoying its status as the sole nationwide specialty retailer of consumer electronics following the demise of rival Circuit City. While the overall retail and consumer electronic sectors have taken a beating for the past couple of months, this period of weakness gives investors the perfect opportunity to build positions in the retail space. With its market dominance and strong value proposition, BBY should be considered as the preferred pick for the sector.

BBY is in an excellent position to capitalize on Circuit City's liquidation and gain a portion of the former's market share. Analysts expect BBY to capture a lion's share of Circuit City's former costumer base, given that both companies had similar product offerings. In addition, the company has a strong management team in place which steers the franchise towards long-term growth. Having an excellent management team is extremely important, particularly with BBY's plans for aggressive overseas expansion. Furthermore, the company's differentiated services such as the Geek Squad and on-site installation gives the company an edge over discount channels and online retailers.

In addition, the easing competitive environment could help insulate BBY from the challenging macro-economic outlook. The retail sector has been under-pressure for the past couple of months, declining by around 3.2% in December 2008. The unwillingness of consumers to spend in the face of recession is expected to persist for the next couple of months. Despite these near-term challenges, the long-term outlook for the sector remains promising. The appetite for consumer electronics is expected to remain healthy in the long run, particularly in the TV sector as flat panel TVs continue to grow more popular. Furthermore, the demand for consumer electronics is expected to pick up once more positive economic news trickles down, which could support further growth for the sector, albeit at a slower pace.

With its more than 1,150 stores in the US and overseas, BBY presents a compelling investment case, with its ability to capture the long-term earnings potential of the sector. However, this optimism does not discount the ongoing threats facing the company. New competitors are starting to emerge, with retail giant Wal-Mart (WMT) building a presence particularly in TV space, offering a wider range of brands at a competitive price. There is also an increasing shift towards online retailers, and Amazon (AMZN) continues to benefit from this increasing trend. The tempered demand for consumer electronics could also cause on over-supply in the market, which may force retailers to cut pricing and impact their earnings potential. Nevertheless, BBY offers a unique long-term value proposition on the back of its market dominance, differentiated services and wide distribution network. For investors wanting to establish and build positions in the consumer retail space during this period of consolidation, BBY provides an excellent avenue for achieving this.

Learn more about this author, Pauline.
Click here to send this author comments or questions.