Will Best Buy Live Up to its Name?
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Consumer electronics retailer Best Buy (NYSE: BBY) has been one of the hottest companies in the news for quite some time now. It has been struggling really hard to fight the troubles which are lined up in its way. Recently it posted an extremely poor quarter, sending the stock to new depths. The company registered a 3% decline in revenue, clocking in at $10.55 billion. Neither the top line nor the bottom line could meet analysts' expectations. In fact, the earnings were even worse with a disheartening drop of 41% to 20 cents a share. Let us understand what this electronics retailing giant has in store for investors.
What’s Going on?
With investors already losing 24% of their money in Best Buy since the beginning of the year, it seems there is still little hope for the company. Amidst changes in its top level management, the biggest problem for Best Buy is the growing importance of online retailers such as Amazon.com (NASDAQ: AMZN). These companies offer a wide variety of products accompanied by huge discounts which tempt shoppers to buy them online. This is easily affordable for the online retailers since they have no huge costs involved in maintaining huge showrooms. On the other hand, retailers such as Best Buy find themselves pulled down by heavy costs and falling prey to “show rooming.”
Retailers such as Wal-Mart (NYSE: WMT) have been able to fight this problem by managing efficient online operations accompanied by nearby stores where the products can be picked up conveniently by the shoppers. Even Best Buy has been developing its online operations, but it has a long way to go. However, Best Buy has been closing its high cost stores in order to concentrate on the profitable ones only. A small powerful company is a better bet than a large loss making giant.
But this is just the beginning. Another key issue faced by Best Buy is the increasing consumers’ attraction towards smaller electronics such as smart phones, tablets and other related gadgets instead of bigger high margin items such as television sets, computers and the like. Here again, Amazon has eaten away the retailer’s market share in large part because of its “Kindle Fire” which has attracted much customer enthusiasm.
Problems or Potential Benefits?
Moreover, the consumers have been eagerly waiting for the launch of Apple’s (NASDAQ: AAPL) iPhone 5 because of which they have been restraining themselves from spending. Apple itself saw a sequential decline in iPhone sales in its last reported quarter as consumers are gearing up for a September launch of the next iPhone. With this launch next month Best Buy can expect some windfall gains. Hence, there is much anticipated benefit for the electronics retailer.
Best Buy has been cutting down on its promotional spend since there were huge costs being incurred because of its business restructuring. But with most of the restructuring already in place, the company is expected to get back to its heavy promotional mode since that will make its products more salable.
Additionally, new product launches are expected in the coming months which will drive the company’s performance. It will be interesting to watch a turnaround for the retailer if these points work out well.
Best Buy has a number of points to look forward to such as the expected releases and its restructuring plan which will deal with costs to a large extent. But a company should be dynamic so that it can easily change with the changing consumers’ tastes and preferences. An area for massive improvement has been the online operations with a strong delivery network which can act as the magic wand for this electronics giant.
The company is also lacking on the advertising front which, if taken care of, can capture customers’ attention. A smarter way to do it would be online advertising which pulls greater customer attention. However, it is very difficult to be very sure about the company’s future at this juncture, especially with the new CEO stepping in. Hence, it is better to stay on the sidelines till we witness the turnaround plan working in favor of the company.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Best Buy. 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.