Shares of Best Buy (NYSE: BBY ) rose nearly 5% yesterday after the consumer electronics retailer posted better-than-expected quarterly results.
Best Buy is pretty popular around Fooldom. Several of our newsletter services like it. Fellow Fool Alyce Lomax feels that "value-minded investors should give the electronics retailer props" after yesterday's report.
I have to respectfully disagree. Best Buy may not be the second coming -- and going -- of Circuit City, but the chain has nonetheless peaked.
Let's go over the reasons why I think yesterday's buyers are running into a burning building.
1. Relative improvement isn't absolute improvement
After posting back-to-back quarters of cascading revenue, comps, and earnings, investors were delighted to find that just profitability and same-store sales took a hit. Revenue managed a 1% uptick.
Exceeding hosed-down expectations does not a turnaround make. The trend here remains ugly. Net income fell 12%. Comps slipped by 1.7%. There is nothing to indicate that a turnaround is actually taking place.
2. Media's digital makeover leaves Best Buy out in the cold
Walk into your local Best Buy, and you'll find that CDs, DVDs, video games, and books make up a large chunk of the retailer's selling space. That makes sense. Folks may not always need a new washer or a high-def TV, but there's always a fresh slate of new music, books, movies, and games worth buying.
Alas, all four of these platforms are gradually moving toward digital distribution. There's no longer a need to drive to a store to make things happen. It's true that Amazon.com (Nasdaq: AMZN ) has been eating Best Buy's lunch through the convenience of online orders, but ordering from home isn't the only reason for Best Buy's decline. Physical distribution is dying, caving in to the immediacy of digital distribution.
Best Buy has given digital distribution a half-hearted effort, and now it lags the more vibrant ecosystems that Amazon and Apple (Nasdaq: AAPL ) have created.
You naturally have plenty of big-ticket items at your local Best Buy that will never be e-replaced, but the company can't save itself by simply becoming hhgregg (NYSE: HGG ) , a 175-unit chain that devotes a large chunk of its 30,000-square-foot stores to appliances. The booming Best Buy that you remember is no longer there -- or possible.
3. Best Buy can't win
The chain hosted an analyst day two months ago, hoping to woo investors to its ambitious goals. But every strategy that Best Buy laid out for its investors carries a pile of attendant risks:
- Best Buy is starting to think smaller, opening Best Buy Mobile stores selling the latest smartphone gadgetry within the next five years. It sounds great, but copying RadioShack (NYSE: RSH ) doesn't sound like a recipe for success.
- Best Buy plans to double its online sales to $4 billion in the next three to five years. How? It's not going to compete with Amazon and Buy.com unless it slashes prices, and if it does so in cyberspace, it can't cheat in-store buyers by not following suit in its stores. In other words, growing online sales will come at the expense of overall margins.
- Best Buy wants to double sales in China over the next five years. It was smart enough to hook up with China's Five Star appliance chain several years ago, but selling stoves in China is a low-margin affair.
- Finally, Best Buy wants to grow its video game and appliance sales. Well, GameStop (NYSE: GME ) may be holding well, but anyone at E3 can tell you that digital delivery and social gaming are the future. Selling more appliances makes sense, but it's a strategy that didn't save Circuit City.
So where do I have this wrong? What scenario makes Best Buy more relevant in three years than it is today? Its last three quarters have been stinkers, and any growth in the quarters before that were related to Circuit City's liquidation.
I hope I'm wrong. Way too many Fools whom I admire and respect see Best Buy differently. However, in every possible scenario and configuration I play out, Best Buy continues to sink -- and stink.
Let's pretend you are Best Buy's new CEO. What would you do to get the chain back on track? Share your thoughts in the comment box below.