Will Best Buy's Television Woes Sink This Tech Titan?

Best Buy (NYSE: BBY  ) really couldn't have picked a worse day to report a bad quarter, and make no mistake about it, the quarter was extremely bad. Tuesday morning, the Department of Commerce also reported that in November, overall retail sales had reached levels not seen since before the recession in 2007. I do believe that Best Buy's quarter was more of a company-specific misstep rather than an indictment of a weakening technology and electronics sector.  However, the results point to trends that are boosting some technology companies and hurting others, particularly those involved in television manufacturing.

More options for consumers
I don't generally shop at Best Buy seeking a pleasurable experience or attentive and knowledgeable customer service; I think most consumers feel the same way. I understand that the big-box electronic retailer likes to promote a customer-centric appeal, but at its core it's a one-stop shop for all of your electronic needs. This wasn't a problem for the company when you couldn't find everything they sell online for the same price, and in many cases lower prices, from a variety of vendors. However, this is now the case, and Best Buy's management seems as lost as many of its employees trying to provide assistance on a vast array of gadgets.

It has not helped Best Buy that today's hot gadgets are smartphones and just about anything Apple (Nasdaq: AAPL  ) makes. As a consumer, would you rather buy your iPad at Best Buy or directly from the source through Apple's online store or at one of its growing number of retail stores? If you are a Verizon (NYSE: VZ  ) or AT&T (NYSE: T  ) customer, are you buying a smartphone at Best Buy or at one of the wireless provider's retail locations? While Best Buy has done better than other retailers at getting ahead in offering Apple products and mobile products, in the end I think most would opt for the specialized service, and the opportunity to speak with the lookalikes at Apple's Genius Bar.

If it's not the specialized service that is contributing to market-share losses, maybe it's the online army of retailers led by Amazon.com, and the always imposing Wal-Mart's (NYSE: WMT  ) continued push into the space. Best Buy's year-over-year online sales gains faded from 21% in the first quarter to just 7% in the third quarter.

An industry on the decline
From a broader prospective, investors can learn a lot from Best Buy's most recent quarterly report, aside from the fact that it was really bad. While I certainly would not be a buyer of Best Buy stock even after the beating it took on Tuesday, management's insight on continuing trends in the television business has me avoiding another name as well.

The flat-screen television was only a few years ago what tablets and smartphones are today. However, the once-booming business is on the wrong side of the slope, as consumers are shifting discretionary dollars toward mobile electronic devices.  In addition, the premium television manufacturers that Best Buy promotes heavily have been hit particularly hard as the struggling economy has led to consumers downgrading to entry-level brands. Best Buy competitors like Wal-Mart and Target (NYSE: TGT  ) have stolen market share by discounting these inexpensive brands, essentially using them as loss leaders.

In addition, consumers have been slow to adapt to the updated technology that the premium brands are pursuing, such as 3-D and IPTV (Internet protocol TV), as they wait for more content to develop. One obvious name investors might avoid on this news is Sony and some of its competitors in the premium television market. However, I'm more concerned about television component maker Corning (NYSE: GLW  ) .

A struggling company
Corning is a specialty-glass maker that manufactures the glass for liquid crystal display (LCD) panels on flat-screen televisions. The collapse of Corning's fiber-optic business has made its LCD segment that much more important to its success. Corning has about 55% of the total LCD market, but it also represents close to 50% of the company's revenues, and just about all of its profit. So you can see how badly the company would be hurt by a continuing decline in television sales. Sure, the company's glass is used in many of the mobile devices and tablets that are flying out the door, but there is a lot less product needs in these devices.

Unfortunately, the Best Buy news isn't the only piece of negative data that has been reported about the LCD space recently.  Last month, Corning reported that LCD prices continued to fall faster than volumes can rise. In addition, the company finished the third quarter with 17 weeks of inventory, which is an improvement over the 18.5 weeks of inventory it began the quarter with. However, this level is still on the high end of where the company would like to be.  In addition, I don't think investors can look to Corning as a value play because it trades at about 15 times its free cash flow, which is a little rich for my blood.

Perhaps Corning investors can get excited about its new scratch-resistant Gorilla Glass. As fellow Fool Rich Smith points out, the company has been promising investors $300 million in revenue streams from the innovation, and one analyst believes it has the potential to deliver more than $1 billion in annual revenue. These results are yet to be seen, but until we see more Gorilla Glass on more devices, I don't see any reason to play around with the broken glass.

Fool contributor Andrew Bond doesn’t own shares in the companies listed. Best Buy and Wal-Mart Stores are Motley Fool Inside Value choices. Apple, Amazon.com, and Best Buy are Motley Fool Stock Advisor recommendations. Wal-Mart Stores is a Motley Fool Global Gains pick. Motley Fool Options has recommended buying calls on Best Buy. The Fool owns shares of Apple, Best Buy, and Wal-Mart Stores. 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.


Read/Post Comments (5) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 18, 2010, at 1:51 PM, mullaroundman wrote:

    Nice Article. Concise and thought-provoking. Special service and Jobs lookalikes. Great points. The Fools are as foolish as they claim. Looking at other merchandise besides Television, I have noticed that Target and Walmart have impessive camera-camcorder counters and video game cases. Any Fools have any insight on these categories?

  • Report this Comment On December 20, 2010, at 9:17 AM, BBRAF wrote:

    there is no doubt that rivals are eating best buy's lunch but tvs are still sold in this country if not at the rate that some would have liked.then tere is the rest of the world where tvs are still sold at a very good clip and this market is still growing.corning is selling over 50% of the glass in htese tvs.add to this the massive growth of gorilla glass witch is exclusive to corning and you have fast growing market since most of the electronic devices will have to switch to gorilla to compete.

    ps corning is selling at 10 multiple and change and financialy sound.

  • Report this Comment On December 20, 2010, at 7:15 PM, scooter186 wrote:

    Thanks for the article. I still think GLW is cheap.

    According to Yahoo numbers:

    P/E: GLW 9.19 vs. Industry Avg.= 19.60

    PEG: 0.84 vs. 1.02

    Operating Margins: 21.41% vs. 3.82%

    These numbers don't factor in the Gorilla Glass potential, which has the possibility of replacing current computer monitors and be a convenient alternative to the mouse.

    You laugh now...just wait. :)

  • Report this Comment On December 21, 2010, at 5:29 PM, TMFRhino wrote:

    I'd caution people to understand how their JV is consolidated and how that works with cash flows before getting two hung up on the P/E.

    -Eric

  • Report this Comment On December 25, 2010, at 4:33 PM, jasonhad wrote:

    Oh, right. I keep forgetting the the USA is the center of the Universe. Even though Flat-Screen TV penetration in the rest of the world, which comprises about 20 times the number of American households, continue to evolve upward, particularly in Latin and South America, Asia, China, India, we are to assume that the sales decline in the USA - and particularly in Best Buy - must be evidence of a world-wide slowdown of consumer acceptance of the flat-screen TV. Why, then, does Sony continue to forecast 15% growth in shipments year-on-year? So, folks, don't buy GLW, let the share price languish for a while until I get my annual bonus in mid-January. After that, you can bad-mouth it as you will, but fourth-quarter resuts are going to blow away the gurus.

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