Best Buy shares up on sales trends

Best Buy Co.'s stock jumped Friday, making it the top gainer in the S&P 500 by midmorning, after it reported improved holiday sales online and showed signs of turning around falling sales in its stores.

THE SPARK: Best Buy said Friday that its revenue at stores open at least a year fell 1.4 percent for the nine weeks that ended Jan. 5. This is considered a key measure of a retailer's financial health because it excludes results from recently opened or closed stores.

This measure fell in its international markets and was flat in the U.S., which is its most critical market. This is just below the 0.3 percent increase reported in the U.S. during the prior-year period, but the company said it was an improvement over the past several quarters. And online revenue showed strong growth, increasing 10 percent for the holiday period.

THE BIG PICTURE: Best Buy Co. has been trying to complete a turnaround plan aimed at improving results as it faces tough competition from discounters and online retailers. The company put a new CEO in place in August and made other management changes. It has also beefed up its customer service, revamped stores and cut overhead and supply-chain costs.

Best Buy's improved online sales were particularly encouraging to investors because a top concern has been that people browse electronics in Best Buy's stores and then go home to buy them more cheaply online, a practice known as "showrooming." The increase in online revenue over the holidays shows that the chain is managing to grab its share of online buyers as well.

THE ANALYSIS: Analysts were broadly encouraged by the improved sales trends, which exceeded the market's low expectations, but maintained some concerns about the retailer's future.

Key Banc analyst Bradley Thomas said that while sales results were encouraging, management did not comment on profit margins and significantly lowered its full-year free cash flow guidance.

The analyst said that he believes margin performance remains a key question as Best Buy has run a number of initiatives, such as price matching and increased associate training, to better compete during the period. These could potentially hamper its margins.

While the company's stock is at all-time lows, Thomas still recommended that investors stay on the sidelines until results stabilize and show further signs of improvement. He maintained a "Hold" rating on the stock.

SHARE ACTION: The news was still enough to encourage investors eager to see some good news from the retail chain. Its stock increased $1.44, nearly 12 percent, to $13.65 by midmorning. Best Buy's shares have lost about three-quarters of their value since 2010.