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This week we are running a screen to identify the top-performing retail stocks so far in 2013. Retailers are well represented in the Value Line Investment Survey, accounting for about 8% of the 1,700 companies we follow. We divide these roughly 130 issues among six industries: Retail Automotive, Retail Building Supply, Retail (Hardlines), Retail (Softlines), Retail Store, and Retail/Wholesale Food.

Company

Ticker

Industry Name

 Total Return YTD

SUPERVALU INC.

SVU

Retail/Wholesale Food

     142.1%

ValueVision Media

VVTV

Retail (Hardlines)

     136.7

Best Buy Co.

BBY

Retail (Hardlines)

     105.3

Nautilus Inc.

NLS

Retail (Hardlines)

     103.4

Pacific Sunwear

PSUN

Retail (Softlines)

       69.8

Cabela's Inc.

CAB

Retail (Hardlines)

       56.8

Susser Holdings

SUSS

Retail/Wholesale Food

       54.0

Lumber Liquidators

LL

Retail Building Supply

       54.0

Zumiez Inc.

ZUMZ

Retail (Softlines)

       49.1

Haverty Furniture

HVT

Retail (Hardlines)

       47.8

Many of the companies that made the list, including SUPERVALU (SVU), ValueVision Media (VVTV), and Best Buy Company (BBY), have encountered hard times in recent years, and investors, at least for now, appear to be feeling more sanguine about their ability to get back on track. Still, considerable risks remain before these turnaround stories reach “happily ever after,” and their respective stocks will likely remain subject to wide price swings in the meantime. Below we take a closer look at Best Buy shares to get a better sense of the risks and potential rewards investors could expect to encounter when taking a position in this Minnesota-based retailer.

Best Buy Company operates over 4,000 stores, including more than 1,000 Best Buy locations in the United States. The retailer generates nearly $50 billion in revenues each year through the sale of consumer electronics, computers, software, and appliances. After a long stretch of nearly uninterrupted growth, the company hit a rough patch in recent years, and its stock (even with the recent rally) is trading at roughly half of its post-recession high of nearly $50 a share.

The retailer’s top line has stagnated since fiscal 2009, and earnings have begun to falter in the past year. The current fiscal year, which ends February 1, 2014, figures to be a difficult one as well, with sales likely suffering a low single-digit drop and earnings declining more than 15%, to $2.20 a share. The company has also struggled with turmoil in the boardroom and corner offices. On this score, at least, there appears to be signs of progress. Best Buy’s founder Richard Schulz was ousted as Chairman last year for withholding information about the alleged misconduct of then-CEO Brian Dunn. Mr. Schulz then launched a takeover attempt for the company, but recently abandoned those efforts and rejoined the company in the role of Chairman Emeritus.  

Meanwhile, Best Buy is still trying to work through its difficulties at the operating level. These efforts are now being led by CEO Herbert Joly, who joined the fold last summer. Understandably given the recent difficulties, the focus is on improving results at existing stores rather than opening new ones. In fact, the number of units in operation is likely to decline as weaker performers are weeded out. (In this vein, the company recently announced plans to sell its stakes in Best Buy Europe to its joint-venture partner, Carphone Warehouse Group.) One top priority is to increase same-store sales. Other initiatives include shifting the sales mix toward high-margined items, such as mobile phones, appliances, and accessories, and creating a more efficient supply chain. At the same time, the company is also working to bolster its presence online, which would help it to better compete with web-based rivals, especially Amazon.com (AMZN).  

Overall, we think Best Buy shares are an intriguing selection for long-term investors. Even with the recent advance, this equity still appears to offer healthy recovery potential to 2016-2018. Meanwhile, BBY stock gets a respectable score for Price Stability (55 on a scale of 5 to 100), but at this early stage of the company’s turnaround, we think of it as more of a speculative holding. Notably, our long-term projections, which call for annual earnings to reach $3.70 a share over the next 3 to 5 years, assume that comparable-store sales get back on a growth track. This can be a daunting task in the competitive world of retailing and significant setbacks on this front would likely cause Best Buy’s earnings in the second half of the decade to fall short of our projections.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.