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Three Reasons Why Best Buy Won’t Engineer a Turnaround

Evan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you are in the mood for a shot of nostalgia, just walk in to any Best Buy (NYSE: BBY) location: you’ll feel as if you were walking through an old Circuit City before the doors were closed for the last time.  In fact, my local Circuit City location was replaced with none other than a Best Buy.  The Richfield, Minnesota based corporation has essentially the same business model as the now defunct Circuit City:  selling electronic equipment in large retail stores.  Other companies with that business model are finding it increasingly difficult to compete with Internet retail giants such as Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY).

Best Buy is an example of the state of the retail industry as a whole.  Sales have fallen for eight straight quarters, with a 0.8% drop in its fiscal 2011 and a 2.1% drop in 2012.  The company’s stock is collapsing.  As the Christmas shopping season has come to a close, an important question needs to be asked:  is there any “ho-ho-ho” left for the fraught electronics retailer?  The Christmas shopping blitz might provide a miniscule short-term bump.   But, unless Best Buy undergoes a radical revitalization, there is pretty much nothing barring Best Buy’s eventual bankruptcy.

The electronics retailing industry as a whole is on the decline, and Best Buy’s internal issues do not help in its quest to resolve external industrial issues.  Best Buy most likely won’t be able to resolve its internal issues and cannot change the external state of retailing.  We will look at three reasons why I believe Best Buy will not be able to manufacture a turnaround.

1.) The electronics retail industry as a whole is struggling

In an informative article on Forbes.com, Laura Heller illustrates the extenuating circumstances that Best Buy has no chance of changing.  If you aren’t a company like Amazon, eBay, or Apple (NASDAQ: AAPL), then most likely, the retailing world is a pretty dark place.  But why is this so? 

The three companies mentioned above have built their businesses around selling highly popular and useful consumer electronics goods.  But that’s not all that they do.  Amazon, for example, started off as an online book seller, which has now expanded into retailing almost anything that can be shipped known to man.  eBay was established as an online auction website where people can bid on goods they desire.  Now they have expanded by heading up the highly popular PayPal online payment system.

Now let’s take a look at the proverbial dark side of the moon.  Although Best Buy does have some large cash reserves on hand, they are heading towards either a buyout or eventual bankruptcy.  Best Buy isn’t as lucky as the more powerful companies of the future because Best Buy is still relying on an outdated model of revenue generation which is fast going by the wayside.  Best Buy can’t change the consumer shift to online retailers because consumer demand and product innovation are at the market’s mercy, not Best Buy’s.  But, Best Buy can change some other aspects which are further detrimental to the company’s future.  The problem is:  those issues are not being worked out, and the company is only compounding the problems it already has.

2.) Best Buy has a very poor P.R. image

In order to demonstrate this point fully, let’s take a step back in time and look at where Best Buy was only a few years ago.  Best Buy was once proclaimed the “Company of the Year” by Forbes in 2004, and the company also landed a spot on Fortune magazine’s prestigious “America’s Most Admired Companies” list in 2006.  Best Buy’s sales were great, and the company had a positive reputation with consumers.

Oh, how far Best Buy has fallen.

The company now has a less-than-stellar reputation among frequent shoppers, being derided for rude employees, slow service, poor upkeep, and mismanagement of handling technical problems.  Best Buy has come to the point of being the store that everybody flocks to…only long enough to see cool gadgets and gizmos before going onto Amazon and buying them there.

Best Buy’s new CEO, Hubert Joly, has been busily promoting his “Renew Blue” program, which aims to revitalize the consumer electronics retailer's fortunes through an emphasis on great customer service.  Although this move is an indicator that Best Buy is starting to seriously try to change its abysmal customer service sector, it is probably too little, too late.  And, the company has just made the paradoxical decision to cut one of its more popular email services to help decrease costs.  Best Buy has a very poor P.R. image, and even if it was able to turn over a new leaf with its image, it probably wouldn’t survive long enough to see the light of day.  A radical reconstruction of Best Buy would most likely take years at best.  If a company does not have a good image with consumers, then there is no way that company can be truly successful for the long term.  Best Buy has not taken the necessary measures to keep up its previously good reputation, and the results are strikingly apparent today.

3.) The architect of the company is gunning for a buyout

Richard Schulze, former executive director of Best Buy, desires to fight to save the electronics giant that he founded 46 years ago.  He has proposed buying out the company he used to work for, but this proposal has been met with heavy criticism as his proposal had significant strings attached.

It is important to note that, according to Forbes, “when Schulze made his initial proposal, ratings agencies cautioned that a debt financed takeout could further cloud Best Buy’s financial picture.  In reaction to the proposal, ratings agency Standard & Poor’s downgraded Best Buy’s bonds to BB+, a sub investment grade rating otherwise known as ‘junk,’ as a result of Schulze’s proposal.”

The drama and controversy surrounding this buyout is hurting Best Buy’s business, and the buyout itself (if it occurs) will most likely serve as a tiny lifeline for Best Buy shareholders after being thrown off of the sinking Best Buy ship.

Conclusion

With these three major reasons in mind, it’s apparent that Best Buy’s “stocking” is unfortunately filled with financial “coal.”  Best Buy’s struggles are simply indicative of a much larger, underlying issue on the grand stage of consumer electronic retailing.  As companies like eBay, Amazon, and Apple (as well as the significant Apple competitor Google) continue to dominate the pathway to the future; Best Buy and other traditional retailers are being left by the wayside.  It appears that this Christmas season does not have any “ho-ho-ho” for Best Buy shareholders, and unfortunately, unless Best Buy undergoes a radical revitalization, there is nothing barring Best Buy’s eventual bankruptcy.


EvanBuck has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services recommend Apple, Amazon.com, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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