Behind Best Buy’s Holiday Sales

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Best Buy (NYSE: BBY) has become the poster child for declining big-box retailers, valiantly fighting the ever-expanding reach of Internet retail titans like Amazon (NASDAQ: AMZN). Things haven’t been going as well as hoped, but the company did manage to post what seems to be encouraging holiday sales numbers. They didn’t break sales records but they did manage to break the streak of declining sales, which at this point is just as good. The big question is how they managed to slow the erosion of their sales, and at what cost.

Competitor HHGregg (NYSE: HGG) hasn’t fared as well, restating their fiscal guidance on the heels of a disappointing holiday season. The highlights are a 3.6% decrease in net sales compared to the previous holiday quarter and a major downward revision in forecasted sales for the fiscal year. The retailer also put a big emphasis on shifting its inventory mix and improving its inventory management. On the surface, the stores are similar and in many product categories direct competitors, so what did Best Buy do this holiday season that HHGregg didn’t? One simple explanation is Best Buy initiated a price matching scheme that HHGregg did not.

If price matching helped Best Buy weather the holiday sales storm, it did not do so without a cost. Whenever price matching is involved it can function as a double-edged sword, doing as much damage as it does good. Another major retailer Target (NYSE: TGT) recently moved to price match competitors year round, but time will tell how it pans out for them. If increasing (or in Best Buy’s case keeping) sales is the goal, price matching is a viable short-term solution. In Target’s case, it is unclear what the long-term goal is, keeping sales volume is important, but margin compression will likely do more harm than good.

Best Buy has a different trajectory, with the company’s founder looking to take the firm private. Richard Schulze made a bid in August to buy out the company and in December caused the company’s shares to dip on speculation that he might be reconsidering his bid. While he still has until February to make his intentions clear, one thing is certain, the company is scrambling to prove its worth, and retaining sales may be a key part of its strategy.

Whether it is a viable strategy remains to be seen. The company essentially bought holiday sales and at considerable expense. The big box retailer reported flat sales, but also dramatically reduced its free cash flow forecast for the year, cutting it to $500 million from a range of $850 million to $1.05 billion. The cut isn’t surprising; price matching is an expensive proposition, particularly when competing with retailers that pride themselves on being low-cost leaders.

An example of this is Best Buy’s move to price match Wal-Mart (NYSE: WMT) on the iPhone 5, which reportedly lost the company $65,000 in a single day. The short version is Wal-Mart advertised deals without the stock to back them up and stores like Best Buy were caught matching deals that couldn’t be had due to stock shortages. Obviously, if Best Buy’s allegations are true this is an extreme example, but it still highlights an important truth: Price matching leads to lower profit and cash flow. This is likely a major concern for the company because Schulze’s bid to take it private depends on securing financing or enticing private equity firms to join in on the deal. And there lies the major issue, free cash flow is typically a motivating factor in leveraged buyouts and private equity deals. Without stable cash flows, financing will be difficult and a significant decline like the one seen this year might be enough to shut down a deal entirely.

In the end, even though the market may have cheered the halt in sliding sales, the cost to shareholders may have been too much. Without a buyout, the retailer might soon find itself following former competitor Circuit City to the grave.


TigerAnalyst has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and hhgregg. 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!

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