Best Buy's Fight for Life
Neal is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Best Buy (NYSE: BBY) is in the last month of their fiscal quarter. The electronics retail giant has been in a year long tailspin. So with the end of the quarter quickly approaching the speculation will be about if Best Buy can make a turnaround. Over the past year shares have been sliding down faster than an Olympic bobsled with no brakes.
I've spent most of my life in the field of electronics and grew up next to a Best Buy. When I started my freelance media career I sought advice from the employees inside. Of course, it's only out of irony that I would end up working for the exact same store years later. A day into my new job as a tablet specialist I got to learn the Best Buy business model.
Best Buy bases their profits off of the sales of protection plans and tech support. Ten years ago this was genius; in today's economy it isn't realistic. The average consumer has just enough money to buy the equipment needed. When a customer pays for a five hundred dollar laptop they can't afford an extra hundred dollars for tech support. Unless you are over fifty, the tech support isn't going to do any good.
Why does this matter, you might ask? Because Best Buy's failure to adapt to the modern market place profits have tanked. Every time Best Buy sells a laptop they lose money if nothing is attached to it. With online shopping sites like Amazon now leading sales, due to lower prices and convenience, many customers are using stores like Best Buy as nothing more than a showroom.
Because of this the electronics superstore has hemorrhaged revenue and been in free fall. Best Buy has been playing damage control all year and is continuing to slip. Feb. 2 is when the end of fiscal year report is given, and I doubt there will be any major improvements.
Amazon (NASDAQ: AMZN) and eBay have seized control of the industry. According to Bing Finance, the average return percentage on Best Buy stock is a negative fifty percent, and current earnings per share are at -3.36. The days of the specialty stores are grinding to a halt as the only other store-front based competitor, Wal-Mart (NYSE: WMT), is blessed with higher revenue income from their varied types of merchandise.
If you still have doubts about large specialty stores I want you to think about Borders. Remember the book giant who went Harry Houdini and disappeared? Barnes and Noble and Best Buy are in the same position of different parts of the retail industry.
What Best Buy needs to do is restructure their entire business model. I see them doing this to the best of their ability. I'll give them credit for staying afloat this long, but I wouldn't rule out the possibility of them shifting to a mostly online store. Basing profits off of the ability to attach expensive protection plans just isn't practical.
Stock prices will likely hold or drop once the report is released in February. As much as I hate to say it, this company is on life support and I don't see a recovery on the horizon. Wal-Mart is cheaper and Amazon’s convenience is leading to minimal changes. If they show significant improvement then there may be life left in the company after all. A long road is in front of the company in terms of improving share price and keeping the company alive.
My final verdict is to start looking for alternative investments. I love Best Buy as a company, but they have dug themselves in a grave-sized hole. If you doubt the large scale electronics stores are on the decline, then think about Circuit City. Highly successful stores have adapted to the times, but Best Buy is a little too late to the party. I would consider them dead in the water.
nsayatovich has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. 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!