When Best Buy Doesn't Offer the Best Buy
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In November of 2008 Circuit City closed 155 stores and laid off close to 20% of their staff in an effort to remain profitable, six days later they filed for chapter 11 bankruptcy. In 2009 after a bidder for the remaining Circuit City stores could not be found they shifted from chapter 11 to chapter 7 bankruptcy and going out of business commercials were aired as the liquidation process began. After a reported 30,000 employees lost their jobs in the liquidation the company’s website displayed the message “Circuit City would like to thank the millions of customers who have shopped with us during the past 60 years. Unfortunately, we announced on January 16, 2009, that we are going out of business.”
This left Best Buy (NYSE: BBY) as the last standing national big box electronics retailer. However in early 2012 Best Buy announced that they would be closing 50 stores nationwide as part of their transformation strategy and the CEO Brian Dunn stepped down. Along with the 50 large retail closings Best Buy announced they will lay off 400 (and potentially more) employees. The transformation that Best Buy is attempting to complete, before the clock runs out on them, is to a smaller store model boosting drastically its mobile only stores often found in malls. Best Buy actually beat estimates on their first quarter 2012 earnings, however this small spot of slightly better than expected news does not make up the fact that Best Buy has a long tough road ahead of them that will no doubt involve significant downsizing and layoffs.
There was an increase in revenue in this last quarter; however this was mostly due to the fact that this last quarter had an extra week, once this is accounted for revenue actually dropped year over year. Additionally Best Buy faced a 4% lower tax rate this quarter and had 50 million fewer shares outstanding, which also made their results look better than they actually were. Best Buy does have a plan in place to cut 800 million dollars in operating expenses, and they have saved some costs by cutting marketing unfortunately this results in a potential decrease in future sales because there is less marketing. Best Buy has also seen several high profile departures, other than their CEO who resigned because of a misconduct issue with a female employee, the founder and chairman also stepped down because of the misconduct issue. Best Buy has lost their chief of marketing and chief of technology recently and more executives will likely jump ship going forward.
Even with Circuit City and CompUSA gone Best Buy still faces competition from brick and mortar electronics retailers. Radio Shack (NYSE: RSH) which is one of the only remaining national electronics retailers, though they do not use big box store format, is also doing terribly. Their first quarter results were awful, their debt rating is in the junk range and this comes after they made a strategic change and closed 500 locations in 2006 in an attempt to lower operating costs while increasing profitable square footage. In fact Radio Shack lost money in the first quarter of 2012 and in the first quarter of 2011 they only made an after tax profit of $2.5 million. Radio Shacks revenue also dropped nearly one percent to $1.01 billion, Best Buy’s first quarter revenue rose 2.1% to $11.61 billion but this was because of the extra week in the quarter.
Wal-Mart (NYSE: WMT) has since 2007 been boosting their offerings in their electronics section, including home theater offerings from name brands like Sony and Samsung as well as increasing their mobile offerings and their off brand lower priced electronics offerings. As of 2010 Wal-Mart was the second largest electronics retailer after Best Buy, Wal-Mart also increased their mobile offerings by over 60% in one year from 2009-2010 and has since boosted their mobile offerings even more with exclusive plans from T-Mobile. Wal-Mart even struck a deal with Apple (NASDAQ: AAPL) to sell Apple's very popular and high end electronics.
Best Buy also faces tough competition from online retailers like Amazon.com (NASDAQ: AMZN), which offers an online one stop shopping experience and often have free shipping. Amazon has further entered the consumer electronics market by making their own e-reader line and tablet, the Kindle Fire. Amazon and other online retailers face lower costs because they do not have to run expensive stores and their customers often do not have to pay sales tax. Customers can go into a Best Buy, talk to a sales representative about their TV options see the TV’s and then buy the TV on their smartphone through Amazon who has it a little cheaper with free shipping.
Additionally Apple is selling more and more iOS devices and Mac computers every year and the majority of them are sold through Apple’s website or Apple retail stores, Apple can lose money on its retail stores because they make their money through hardware sales. Thus Apple stores have well trained staff and an uncluttered nice atmosphere this draws customers that may have gone to Best Buy to buy an iPod to an Apple retail store, if they have one locally.
The recent 26% drop in profits is just the latest in a string of bad news for Best Buy, which finds itself in a very competitive sector of the retail business. Their stock has been cut in half over the past few years and they have become a free showroom for Amazon. In fact Amazon ran a one day promotion last year that gave customers up to $5 off when they went into a store and then used the Amazon Price Checker app on their smartphone to purchase the item from Amazon instead of the store. However Best Buy is still profitable and with Circuit City and CompUSA both gone and Radio Shack in even more dire straits than Best Buy, Best Buy may survive simply because they are one of the last ones standing. Additionally Best Buy is moving in the right direction, away from big box stores to more focused on smaller higher volume more profitable per square foot stores. Best Buy needs to get its management team in place and on the same page then they need to make Best Buy a place where people want to go to shop.
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