Bye, Bye Best Buy?

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

That nice 10% gain Best Buy (NYSE: BBY) shareholders have enjoyed so far this year? Yeah, that was gone in one, fell swoop this morning. After reporting what were ultimately viewed as disturbing Q4 results, Best Buy really shocked investors with announcing plans to essentially revamp their business model. It’s going to get interesting in the months ahead, folks.

Behind the Numbers

As odd as it may sound, the bottomline results for Best Buy’s Q4 actually weren’t all bad. Now that doesn’t seem quite right based on investor reaction today, but it’s true. The biggest impact on results was a huge, one-time charge for restructuring costs totaling $2.6 billion. Outside of the extraordinary expense items, earnings came in at $2.47 a share, easily beating analyst expectations and demolishing quarter-over-quarter results of $1.62 a share in profit last year.

And revenues were actually up vs. the year-ago quarter by over 3% to $16.63 billion, while margins remained the same – not bad considering the many discounts the company invoked to spur sales. Alas, analysts expected revenues over $17 billion, which didn't help matters.

The silver lining in the Best Buy cloud helps explain why the stock was up in pre-market trading. But then the other shoe fell – management announced the closing of some 50 old-school Best Buy stores and bigger still – a shift in the entire business going forward. In an effort to shave as much as $800 million in expenses over the next three years Best Buy is re-inventing itself - focusing on small, mobile-specific outlets in lieu of expensive to maintain big box stores. There are likely to be job cuts as well with the emphasis on smaller, leaner operations.

Sound a little familiar? Yeah, this is similar to the path RadioShack continues to traverse (though on a smaller scale, of course). As discussed a few weeks ago RadioShack (NYSE: RSH) is in the midst of what the company hopes is a resurgence, and there are some indications they are on the right track. Consumers are slowly coming back to electronics – something leading retailers like Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) have been hoping for. Both Wal-Mart and Target – as positive as their results have been – have lamented the drag on earnings poor electronic sales have had. As that begins to turn around the Best Buys of the world should benefit. But is it too little too late?

For the contrarians amongst us Best Buy may seem like a bargain worth betting on. At a mere 8.6 times earnings – and only 6.5 times future earnings – Best Buy is easily the cheapest of the bunch. And with nearly $2.4 billion in cash the company isn’t going under in the near future. This compares with one of Best Buy’s primary competitors – Aaron’s (NYSE: AAN) – which trades at nearly 18 times earnings and has a balance sheet that can’t even compare to Best Buy’s.

As tempting as it may be, don’t. Want to bet on mobile and consumer electronics in 2012? May as well enjoy RadioShack’s nearly 8% dividend along the way. Best Buy may not be going bye, bye but there are simply too many uncertainties to warrant the risk.

The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.

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