Not the Best Buy Right Now
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A better than expected earnings report from Best Buy (NYSE: BBY) created some noise the other day on the strength of slightly better top line sales and profit as the beginnings of their cost-cutting strategic plan came into play. Their earnings came from rising sales of tablets, mobile phones and e-readers while cameras, TVs, notebooks and games/consoles fell off. Comps were off 4% and overseas sales continue to struggle, especially in China where the company’s plans have not been revealed in full.
Basically, Best Buy had a good quarter because Apple (NASDAQ: AAPL) had a good quarter. Since no one is expecting Apple to stop having good quarters, in the short term Best Buy’s revenues look relatively safe.
Re-imagining Retail
The problem facing most big retail stores is the 6 megabit pipeline in the living room, the Internet. Best Buy has not fully taken to embracing online sales and though sales are increasing -- $2 billion in online sales last quarter -- it still represents just 17.2% of total revenue. Management’s plan is to double their online business in the next 3 to 5 years.
Best Buy is tied to its large retail footprint, which it is in the process of putting on the paleo-diet by shuttering 50 North American stores while opening twice that many smaller, kiosk-style Best Buy Mobile stores, which will be focused on mobile computing and service as opposed to the Wal-Marts of electronics that they currently own. This is part of their overall plan to slash $800 million in costs.
Retail is going through a massive upheaval, especially for easily cross-shopped items like consumer electronics. Best Buy, like Target, whose market cap is nearly six times that of Best Buy’s, has fallen victim to show-rooming, where the shopper uses the physical store to sort out their purchase and then buy it online. And, since Americans have been conditioned not to haggle over price, sales that might have been made then and there are lost to companies like Amazon or Newegg.
Eye of the Apple Storm
Apple is both a blessing and a curse right now for Best Buy in that they account for nearly as many sales of iPhones as Apple’s own stores do, 13% vs. 15%. The problem is that Apple is also very selective about what other retailers are allowed to sell and in what quantity. So while Apple allows them to sell the new iPads, Best Buy only gets so many and what they do get have very thin margins.
This quarter’s earnings were strong given that Apple was between new product launches having released the iPhone 4S in October and the latest iPad only released two weeks before the end of the quarter.
Best Buy, like a number of retailers, have to be hoping for a strong showing from Microsoft’s (NASDAQ: MSFT) Windows 8, Xbox 720 and Windows 8 Phones to create some competition among the dominant ecosystems out there. Google’s Android is not an ecosystem with the same scope as both Apple and Microsoft -- from that perspective it is still in its infancy. Microsoft’s strategy, which comes into its own with Windows 8, has potential but it will need the killer app/game/phone to drive excitement and steal some of the Apple/Android inertia.
More than half of their big box stores have Apple stores-within-a-store (SWAS) -- how many of the new Best Buy Mobile stores will do that to the exclusion of other brands is unknown. But, given Apple’s leverage, expect push back with Best Buy caught in the middle if Windows 8/Phone picks up serious momentum in the second half of this year.
For Best Buy, downsizing their footprint -- mirroring the changes that are happening in computing -- is a good first step toward stopping the bleeding to the Amazons of the world, but it will have to re-invent itself as something more, a local resource for service and support as well as a retailer if the company wants to drive growth. The company is trading at a 23% discount to its assets minus debt. They are still paying a 3.3% yield and the stock has fallen below $20 and there is no current support to turn to. Net margin was 2.2% this quarter and that will likely not improve in 2012.
Best Buy has a strong brand and a bad model currently. Like Nokia, H-P and Dell they are a potential turnaround story that will need time in a deteriorating U.S. and European economy and no clear strategy for China, which makes this a difficult stock to recommend. Why would someone buy Best Buy when Corning is both good value currently and has excellent growth prospects?
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Best Buy, Corning, and Microsoft. Motley Fool newsletter services recommend Apple, Corning, and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.
