Best Buy May Be the Next Home Depot (Update 2)
Updated from 3:31 p.m. to reflect CNBC report of J.C. Penney CEO firing and closing share prices.
NEW YORK (TheStreet) -- As Best Buy
Credit Suisse analyst Gary Balter on Monday said in a client note that Best Buy's strategy is to become the consumer electronics version of Home Depot, which he believes carries a premium customer experience, driving above average profit margins.
Best Buy previously has previously been associated with the likes of Circuit City, its defunct big box electronics retail competitor, in addition to J.C. Penney
J.C. Penney said on Monday its chief executive Ron Johnson has stepped down and will be replaced by former CEO Mike Ullman. Johnson was brought to the retailer from Apple to help revive the company's stores and implement a new pricing strategy.
TheDeal reported on Friday that some of J.C. Penney's vendors have been tightening credit and private equity firms are circling the retailer, citing unnamed industry sources.
Comparisons with Home Depot instead of J.C. Penney may be early given the company's post-crisis earnings growth and Best Buy's losses in 2012 and the first quarter of 2013.
According to Balter, the Samsung partnership may boost Best Buy's service experience to electronics customers and help to eventually increase profit margins. If the combined service with Samsung increases customer traffic, it could help Best Buy win back leverage from suppliers such as Apple, boosting overall profits.
"Think of Home Depot, where consumers and pros treat HD's selection as the premier selection in the home improvement category... The value of that shelf space cannot be underestimated in this relationship. That is a primary reason why HD delivers double-digit margins," wrote Balter, who also cited AutoZone
The Samsung partnership "is the first signal that vendors understand the value add that Best Buy can bring to the consumer purchasing process, something which to date has been undervalued by both suppliers and investors," according to Balter.
Were the Richfield, Min.,-based retailer to eventually be associated with a premium experience, it could pressure Apple to make store-in-store displays more supportive of Best Buy. Currently, Balter estimates Apple's space within Best Buy stores carries some of the retailer's lowest profit margins.
Best Buy shares traded higher by over 2% in Wednesday trading, closing at a 12-month high of $25.96. The shares were among the biggest gainers on the S&P 500 on Wednesday.