You're Missing the Point, Best Buy

Shares of Best Buy (NYSE: BBY  ) were initially indicated to open higher this morning, despite announcing a sharper-than-expected drop in sales during the telltale holiday quarter and revealing cost-cutting plans that include shuttering 50 stores and hundreds of layoffs at the corporate and support levels.

However, somewhere in the hour leading up to the market's opening bell, reality sank in. A step back isn't the first step before taking a giant step forward -- at least not in retail.

Best Buy's stock opened 5% lower, and rightfully so.

Retail 101
We've seen this backpedaling before:

  • Circuit City announced that it would be closing 155 of its stores in November 2008. A few months later the entire chain was being liquidated.
  • Borders went public with plans to shutter 200 of its bookstores in February 2011. Like Circuit City, a few months later the entire chain was being liquidated.
  • Movie Gallery shut down 520 of its 4,500 video rental stores in 2007. A couple of years later, the entire chain was being axed.

Now, it's fair to argue that Circuit City and Borders were already in bankruptcy protection at that point. Best Buy is a very profitable company at the moment, and its near-term liquidity is not even an issue.

However, every chain has that moment when it realizes that its relevancy is gone. The first move is to close unprofitable or underperforming stores until it gradually owns up to the reality that it's the concept -- and not just select locations -- that is the problem.

Quick. Tell me one retail establishment that has closed at least 50 stores and has returned to glory.

They're rare -- but they're out there.

Pier 1 Imports (NYSE: PIR  ) revealed three years ago that it would be closing as many as 125 stores. It was a dark time for the home furnishings chain. Its stock was trading for as little as $0.10 a speculative stub. Pier 1 bounced back. Its three-year cumulative comps have soared 30.9% as of its latest quarter. The stock's been a 180-bagger since bottoming out!

We can't forget Starbucks (Nasdaq: SBUX  ) . A year before Pier 1 closed dozens of stores, the baron of baristas moved to close 600 of its European-styled brew shops. We all know that Starbucks bounced back. It's bigger and better than ever these days.

Peer pressure
Why can't Best Buy be the next Pier 1 or Starbucks? Well, let's start with the timing. Starbucks and Pier 1 announced their store closures in 2008 and 2009, respectively. Remember that time? We were in the darkest stretches of the recession. The economy's bouncing back these days. Unemployment's dropping. Consumer confidence is on the upswing. If a chain is cutting loose some of its stores now -- when the retailing outlook is far more upbeat than what's showing in the rearview mirror -- run.

Can a bad retailer in retreat be a good near-term investment? Absolutely. Look at Sears Holdings (Nasdaq: SHLD  ) . The shares have more than doubled this year, even though the parent company of Sears and Kmart is closing down stores, unloading smaller concepts, and fading after years of negative store-level comps.

Best Buy doesn't believe it's retreating, despite the layoffs and closures.

"Best Buy's retail store strategy is to increase points of presence, while decreasing overall square footage," reads the press release.

It's closing superstores, but it will be opening twice as many smaller mobile-specialty stores than it closes. It's also tweaking the concept itself, and that's a plus. Unfortunately, Best Buy is essentially saying that when it grows up, it really, really wants to be RadioShack (NYSE: RSH  ) . Anyone that caught the small-box specialist's disastrous holiday quarter -- where margins got crushed as the emphasis shifted from consumer electronics to mobile -- isn't going to like that vocational switch.

However, there is one line in this morning's falsely optimistic earnings release that should send shivers down the spine of the fine employees donning blue polo shirts and khakis on the way to work this morning. Disillusioned Best Buy shoppers, you're not going to want to read this.

Caveat emptor
"The company plans to introduce a new store labor model to be implemented in all of its U.S. big box stores before the 2012 holiday season that will provide increased store employee training and a new enhanced compensation plan that introduces financial incentives for delivering on customer service and business goals," reads the release.

In other words, if you were always dubious about why an employee was favoring one product over another or turned off by the hard sell of insurance programs and services on the way out, get ready for the hard sell. It's far easier to measure "business goals" than "customer service."

Best Buy's about to become a used car lot.

Best Buy is not a good buy
I entered a bearish CAPScall on Best Buy in Motley Fool CAPS three months ago. The call is beating the market so far, because Best Buy is not. If you want to play nice with the trends that will pay off in the future, forget Best Buy and begin reading up on the stocks that smart investors are buying. It's a free report, but it will only be available for a limited time, so check it out now.

The Motley Fool owns shares of RadioShack, Starbucks, and Best Buy. Motley Fool newsletter services have recommended buying shares of and writing covered calls on Starbucks. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (20) | Recommend This Article (20)

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 March 29, 2012, at 12:27 PM, buffalonate wrote:

    I would have just cut the size of their big box stores in half. Get rid of the CD section and their appliance section. Nobody bought their tv's because they were always more expensive there than anywhere else. They also have always had way more employees there than they needed. They should have been competitive on price and focused just on electronics.

  • Report this Comment On March 29, 2012, at 6:55 PM, CaptainWidget wrote:

    Amen, I've been short on best buy since 29.XX, and I truly believe it's going to zero.

    They are a victim of their business model, plain and simple. Because of massive retail overhead, they have to sell big ticket items at 10% more than comparable online stores, shipping included. This has led them to try to focus on their high margin items as a savior. Basically turning the front of their stores into "apple-r-us". Even getting into the pathetic "used video game" business in some markets (reminds one of blockbuster in their last dying years). Anything to find a few more percentage points of margin, when in reality, everyone else is doing it cheaper and better online.

    The biggest factor in their inevitable fall is and will be their unwillingness to admit it. Big box specialty retail is dead or will be dead. Period. The business model just can't work. The overhead is too high to match prices. They COULD have some success parlaying their branding into "best buy

  • Report this Comment On March 29, 2012, at 7:03 PM, jssiegel wrote:

    I just stopped in at my local Best Buy because I happened to be in the shopping center. All the employees I saw were standing around in bunches BSing, nobody bothered to ask if I needed help. Maybe if was the bad vibes from the bankrupt Linens 'n' Things previously in that space.

  • Report this Comment On March 29, 2012, at 7:08 PM, ecloud wrote:

    Bad service is bad for who Best Buy was trying to be, just at it was for Circuit City; but then look at Fry's... it's even worse. It's just that Fry's has so much stuff, even hard-to-find stuff alongside all the common stuff, that you can't help going back. At the moment it looks like such warehouse-style stores are the last bastion against everybody going online. But if Best Buy throws in the towel (and I do agree they seem to be going nowhere, fast... glad I got rid of my stock already), there must be an opportunity for an upstart to find an edge, offer a good selection and good service too. There has to be some place to go when you want something the same day, and there must be some place for folks who don't like buying online. Probably success will have something to do with relationship-building; you have to hook customers for life, because you can't just compete on price and convenience anymore.

  • Report this Comment On March 29, 2012, at 7:35 PM, Realexpectations wrote:

    Starbucks did!!

    Took me about 2 1/2 seconds.

    Am I quick or what!

  • Report this Comment On March 29, 2012, at 8:09 PM, VieuxCarre wrote:

    I always thought the only way they would survive would be to have a big online presence, but their online interface stinks. I purchased a new fridge based on same as cash financing and the ability to eyeball the thing.

    Nice article. I appreciate the fact based perspective/history.

  • Report this Comment On March 29, 2012, at 8:13 PM, johaba wrote:

    Best Buy has the worst customer service. Have you ever gone in there and try to find a helpful knowledgable employee? You would have better luck trying to rebuild Afghanistan.

  • Report this Comment On March 29, 2012, at 8:24 PM, PaintItBlue wrote:

    They are just making a mess of the customer service. Either the sales people are ignoring you, or they're all over you like a cheap suit. Sometimes it's hard to find out much about the merchandise. And what's with the disappearing reward points? Not that I knew any way I could use them, but when they go bye-bye it's weird.

    And that online selling fiasco over the holidays, where people thought they'd bought stuff and found out too late that Best Buy didn't have it in stock - bad news.

    Wish they could get their act together.

  • Report this Comment On March 29, 2012, at 8:32 PM, CaptainWidget wrote:

    Unfortunately there's no way for them to improve their customer service either. The sales reps aren't working on commission, so they have no incentive to actually sell. And since they're basically minimum wage pay, the only people they can attract is minimum wage skill levels. So try getting good info out of someone who's worth $9 an hour and has no incentive to get better.

    They could hire genuinely knowledgable sales staff, but they'd have to either give commission on sales or raise salaries, both of which hurt their bottom line. Best Buy....things are looking bad.

    There's a great CNBC on Hulu currently about Best Buy and their business prospects (or lack thereof, their CEO is not exactly confidence inspiring). Best Buy is a shorters dream come true. Slow, steady, decline to bankruptcy over the next 5 years.

  • Report this Comment On March 30, 2012, at 12:07 AM, TerryHogan wrote:

    Some possible long short pairs:

    Long Apple short Best Buy - Apple has way cooler stores, way more knowledgeable salespeople, and soon - better TVs.

    Long WMT short Best Buy - In the end, Walmart eats everyone's lunch when it comes to bricks and mortar retail that's not luxury.

    Long Amazon short Best Buy - Compare overhead, margins, revenue growth, and inventory turnover and see what you think.

    Note that Best Buy is the short in all of these.

  • Report this Comment On March 30, 2012, at 12:38 AM, sikiliza wrote:

    The difference between Best Buy and Starbucks comes down to one thing - Leadership.

    What's the name of Best Buy's CEO? Yet we know who Howard Schultz is.

    Both Best Buy and Starbucks employ minimum wage people but the kids at Starbucks always seem chipper and eager to serve. The ones at Best Buy, not so much.

    “An army of deer led by a lion is more to be feared than an army of lion led by a deer.” - Phillip of Macedonia

  • Report this Comment On March 30, 2012, at 2:39 AM, BBLBBD wrote:

    For what it's worth, here's my two experiences at Best Buy in the past few years:

    1. Wanted to buy new laptop and new netbook. Both were pre-loaded with anti-virus, and other software. Wanted product without the add-ons. None were available. Conclusion - will never buy another computer device at BB because I want to choose the anti-virus and other software.

    2. Two years later. Visited BB just to get ideas on new TV. Saw nice TV there. Could not get service at all. When we finally got help, the clerk could not answer questions about TV or the product. Nonetheless, my wife really wanted the TV, so we went back. Of course, the store was sold out of that product.

    My wife really wanted a new and bigger TV, so we bought Samsung Smart TV...even though the clerk knew nothing about it. We enjoyed TV, even though not sure if great price or not.

    However, I went back soon thereafter to buy HDMI cable to make it better. Had to wait over half hour just to get answers on a cable.

    Okay, some of these were mistakes on my part i.e. going back to BB after computer sale....Nevertheless, the experience sucks and I will never go back.

    BB can go out of business and all their employees get on welfare and food stamps like the rest of America for all I care. I will never buy another product from them as long I live.

    Buy their stock if you think a customer driven industry that treats their customers as such can survive in the consumer advantage age i.e. internet.

  • Report this Comment On March 30, 2012, at 3:09 AM, offthecuff wrote:

    It's simple:

    BB is the tech world showroom and Amazon loves them. They pay for lighting, blue decor, and people to guide you through the store, and even people to say have a nice day.

    The rub - most everything they sell is a commodity. Given that, you'll find it somewhere where it's substantially cheaper as Amazon doesn't pay the overhead.

    Have fun, browse through a nice store, the pull out you app to compare prices and move along as you'll most likely make the purchase over the internet.

    The apple model is different - Amazon cannot discount and it's just cool to be in the store and even cooler to get the latest. But remember, there aint nobody getting it cheaper somewhere else. I might shop on line only to avoid the lines, but I like the store, the people know what they are talking about so guess I'll pay the extra 35% to buy something that's cool, intuitive, and priced the same everywhere.

  • Report this Comment On March 30, 2012, at 6:18 AM, moneymunch1 wrote:

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  • Report this Comment On March 30, 2012, at 8:33 AM, mikecart1 wrote:

    I called Best Buy's demise even before Circuit City's. I like to think of myself as a good gauge of what companies are hot and what companies are not. I don't need a bunch of charts or a bunch of stock statistics. I see with my eyes, not with a bunch of math lol. Generally, where I shop, where I go, what I see is what generally is true for the stock price and company.

    Long ago, over a decade ago I stopped going to Blockbuster. Why should I have to rent movies and pay? There are so many ways to get the movies elsewhere. You can even find the same movies for $1-2 for buy on sites like eBay. Why would I pay $3+ to rent them?

    Why would I go to any electronic store and buy when I can go to a site like Amazon or or any other discount online site selling the same thing? I called Radio Shack, Circuit City, Best Buy, and many other stores. How Staples is still around is beyond me.

    Bottom line, all you need to do look around. Where are parking lots full? Where are they empty. Just for fun, here is a real statistic you should pay attention to:

    Empty Lots - Best Buy, Wendys, Burger King, Staples, Office Depot, RadioShack, and ALL standalone stores on outdoor malls that don't have an online path to sales.

    Full Lots - Home Depot, Lowes, McDonalds (yuck), Target, Wal-Mart, Dominoes, PNC, Kohls, and ALL automotive stores that fix cars or sell car replacement items like Autozone.

    It isn't rocket science hehe. :)

  • Report this Comment On March 30, 2012, at 12:43 PM, hbofbyu wrote:

    If Best Buy goes under Costco is going to have to expand their electronics section. Some of us like to physically evaluate a product before purchasing (can't do that on Amazon).

  • Report this Comment On March 31, 2012, at 12:55 PM, mikecart1 wrote:


    That's what free returns are for haha. Zappos is great in this aspect. Free shipping and free returns. :)

  • Report this Comment On April 06, 2012, at 12:33 PM, Jurobi wrote:


    No clue where you live, but the situation here is just the opposite. Best Buys lot is full from the time it opens until it closes, 7 days a week, in spite of a lousy location. Home depot, target, Kohls are mostly empty except at seasonal sales. McDonalds, allright its full for a bout an hour at noon and two hours (5:30-7:30) but is empty the rest of the time, at all locations. Reason: while we are a small city (less than 200 K) we are a hub for shoping in a 80-100 mile radius. Next hub is 120 miles south, same size as us, and the nearest large (over 500K) is 300 miles away. If you want an appliance, you go to best buy or sears. No surviving "mom and pop" appliance stores, no other chains. Best Buy is preferred because you get service locally (sears runs its service out of the aforementioned city 300 miles away).

    Maybe that is what Best Buy should focus on. Small to mid size citiest that are hubs. Besides only a real fool would order a major appliance online, regardless of the savings and "free return".

    The real advantage to Big Box stores is being able to see/touch/smell/hear the product before you buy. Not important for small ticket items like books, cd's, dvd's and small appliances. But very important for big ticket items, especially when you need to consider service.

  • Report this Comment On April 07, 2012, at 8:18 AM, boolanger wrote:

    Let me make a case for Best Buy: Demographics favor a place where answers to basic and intermediate questions for electronic devices can be quickly and accurately addressed particularly for our aging population. TV's, home theaters, speakers, receivers, computers, smartphones etc., make Amazon a non-viable substitute in many cases. Think Home Depot of electronics. While you can buy most items from the internet that are offered at Home Depot, both Home Depot and Lowes continue to prosper. Why? The biggest problem BB faces is the erronious idea they must maintain high margins. Quite the contrary, they need to shrink margins and increase volume. If BB were to sell their items slightly above internet prices, most consumers would purchase from a merchant locally which provides easy returns and valuable information. Best Buy has the unique opportunity to meet a growing need for sound advice and competitive prices, if only they would play to their strengths. Additionally, their growth prospects in Asia and other emerging markets are very encouraging. Best Buy can survive and prosper but until they address their pricing structure and culture they will continue to suffer. Walmart is a poor substitutes for a Best Buy!

  • Report this Comment On April 09, 2012, at 2:17 PM, Popnfresh100 wrote:

    "Quick. Tell me one retail establishment that has closed at least 50 stores and has returned to glory."

    If you were talking about a NET closure of 50 stores, or 50 simultaneous closings, that might be difficult. But that's not what is happening here.

    Best Buy is offsetting the store closings with new store openings in a different format- for a net gain in total locations.

    Better question: name ONE chain (retail or otherwise) with more than 500 stores that has survived for more than 30 years and has NOT ever had at least 50 locations close.

    I can't do it.

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