Retailers: The Search to Buy, Not Buy From

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

There are certain stores that I really like going to and buying stuff. Just because I will burn my cash at their altar does not mean that I want to own the retailer itself. Amazon would be my choice, but its valuation scares me. I might be a fool for avoiding it on those grounds, but I would rather be sorry and keep my money. Still, there have to be some physical retailers out there that are worth buying a stake in.

Support your local bookstore

I wish we could keep bookstores for cultural reasons, but they are businesses after all. Even if Barnes & Noble (NYSE: BKS) stays in business, there is no guarantee that the physical stores will remain. I don't get around to the bookstore as much as I would like. Plus, I got a Kindle Paperwhite and am out of space for physical books. Perhaps, if the chain disappears, then lower overhead local bookstores can see a resurgence.

Barnes & Noble has no debt, but only $213M in cash. The trailing twelve months net loss is $117.41. That makes me concerned about the company going forward. The most recent earnings call said the company did not produce the sales it was expecting from some new products in the 2012 holiday season. It is a tough market.

The Nook has done well, carving out a space for itself, but if the company as a whole cannot generate profits to keep moving along and growing, it would not mean much. The inability to generate sales during the holidays, which is critical for a retailer, has me worried about the company's future.

Barnes & Noble may be snapped up. Between the losses, weak holiday sales, and cash position, it seems that the company is able to muster a last stand, but what would it do? Make a new tablet? Nook Media is a joint venture with Microsoft, maybe that could save it. I do not think the joint venture alone won't be enough.

The last electronics hero

Best Buy (NYSE: BBY) has validated its believers when it comes to the stock. It is up 81% for the year so far. That is impressive, considering we are only in month three. You should not be fooled by the stock price, because the company's future still has some dark clouds.

Closing stores is fine, but how are they going to change existing stores to stay relevant? Being the only retailer for the Leap Motion is a good start. The company lost money over the last 12 months with a trailing EPS of $(0.74). Its most recent quarter was profitable, so hope is not lost. Best Buy needs to consistently add cash and value onto the balance sheet in order to maintain its dividend and keep its options open for potential expansion.

It might be a good idea for the company to offer more niche technology products. People looking for any camera will turn to Amazon, although they might go to Best Buy to see it before buying. If Best Buy can carry specific cameras that Amazon does not commonly carry, or that it cannot command a low price on due to its specialized nature, then it could benefit from a smaller but more purchase-oriented customer base.

It would also allow the stores to have a smaller footprint, though not as small as RadioShack. Best Buy could also consider developing its own product like Barnes & Noble did with the Nook to draw customers in, perhaps a tablet instead of a reader.

Odd things you never knew you needed

Whenever I go to Bed Bath & Beyond (NASDAQ: BBBY), I always end up with something I barely use, but actually need. Last time it was an electric grill. I barely use the grill, but when I am in the mood, it is an absolute necessity.

Bed Bath & Beyond is doing well. Its trailing twelve month net income is $1 billion with a trailing EPS of $4.36, and it is witnessing both top line and bottom line growth. It sports no debt and almost $800 million in cash. Contrast that to Barnes & Noble's situation. Bed Bath & Beyond also sports 8.61% net margin, which is higher than I would expect from a retailer.

It establishes the company's place as a specialty retailer that can have higher margins. There is nothing at Bed Bath & Beyond and other stores the company owns that you can't find anywhere else.

This company is actually opening more stores, as opposed to Best Buy and Barnes & Noble who are downsizing. Opening new physical locations is another surprise from the company, that also establishes its nature as a specialty retailer.

Oddities win

Make no mistake about how much of a gamble Best Buy is. There is some hope it can make a move that will keep it relevant to the future of retail, but that does not make it a buy for the vast majority of investors. I generally like risky, turnaround stocks, but until I understand how Best Buy will innovate for the future, I am waiting and watching. What little information we have regarding its plans have not been enough for me to get off the bench.

I have made my opinion of Barnes & Noble quite evident. I am not sure how it will manage to remain a physical retailer. That would be a shame, but the market for physical books is shrinking fast.

Bed Bath & Beyond has positive earnings, expansion plans, and actually has physical stores I could see sticking around. I would still take a small position in this retailer, because I see it growing steadily but slowly. Eventually, it will just be a dividend investment.

The century long outlook for retail remains bleak. The thing about Bed Bath & Beyond is that while many of its products can be found online in one form or another, you need to go to the store to see the things to realize you need them.


Nihar Patel has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond. 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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