Can This Retailer Go Toe-to-Toe With Amazon?

National electronics retailer Best Buy (NYSE: BBY  ) has done things wrong in the past. It expanded too fast, relied on the box-store format even when it didn't make sense, failed to maximize the value of its core customers, and wore white after Labor Day. If the company were to continue down that path, things would not end well. Investors are worried that Best Buy can't get it back together, but there have been some recent announcements that suggest that this is still a great stock.

The $88 billion elephant in the room
Amazon.com (Nasdaq: AMZN  ) , the company that has been the bane of retail stores for 10 years, is hounding Best Buy. The online giant has almost doubled revenue since 2009 while Best Buy has only increased 12%. Amazon has placed long-term bets on its own growth by investing heavily in new ventures and taking a hit on margins to keep prices low.

Amazon CEO Jeff Bezos is known for playing the long-term growth game and playing it well. Bezos has been called out as the next business tech leader, stepping in to fill the void left by Steve Jobs. Clearly, investors have been impressed with his vision, and that confidence is reflected in the stock's P/E ratio of 144.

Try unplugging it and plugging it back in again
Amazon has been making moves for a while, and Best Buy is finally reacting. First and foremost, it's getting costs under control, closing 50 stores in the U.S. Last year, same-store sales fell 1.7%, and Best Buy has taken this to mean that it's in the wrong markets. The focused closings will allow it to get out of unprofitable areas. To refocus, the company is going to build 100 Best Buy Mobile stores. Its domestic mobile sales segment grew 13% in 2011, and it's counting on that growth to continue.

In order to stay competitive, Best Buy has said that it will use the cost savings from store closures to offer lower prices. In 2011, Best Buy reported an increase in market share, attributed to an improvement in customers' impressions of product pricing. Much of its ongoing work will focus on Reward Zone loyalty customers. In 2012, Best Buy will offer these customers free shipping, to compete with Amazon Prime.

Internationally, Best Buy is going to close its own branded stores in China, focusing instead on growing its Five Star Appliance brand, which was purchased in 2006. The brand increased same-store sales by 8% last year, and Best Buy is going to integrate a mobile offering in stores next year to spur more growth.

Avoiding the Circuit City model
Best Buy needs to take an increasingly offensive stance if it's going to keep Amazon at bay. While these recent announcements point in the right direction, Amazon is not just another competitor. By offering lower prices and free shipping, Best Buy is going to have margins squeezed, just like Amazon.

Even though difficult times are ahead, based on recent purchases, changes, and announcements, I think Best Buy will continue to be a strong traditional retailer. It may never dominate the online space, but it doesn't need to. Just because a company isn't winning on every front at every time does not make it a bad investment. All a good retailer needs to do is to win consistently on one important front.

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Fool contributor Andrew Marder has no stake in any of the stocks mentioned in this article.The Motley Fool owns shares of Amazon.com and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com. 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.


Read/Post Comments (3) | Recommend This Article (3)

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 April 07, 2012, at 1:25 PM, funspirit wrote:

    The one chance I think BBY has is selling higher margins products in smaller stores. All the expensive real estate to sell commodities buyable at Amazon without a line is a no go.

    http://www.richmakesyourich.com/2012/02/best-buy-lost-in-ama...

    This predictive column article was written a month before BBY's earnings.

  • Report this Comment On April 07, 2012, at 1:47 PM, ravens9111 wrote:

    In my opinion, it's just a matter of time before Best Buy starts closing down stores. It's possible they could devote more resources to improve their online presence, but I don't see how they can compete with Amazon in the long run. Amazon sells pretty much everything you can think of. Best Buy focuses on consumer electronics. Even if Best Buy can increase online sales, they will have to do so at much lower prices. Not only will this compress margins, but it will cost money for them to change their strategy. Razor thin margins can work for companies with large revenue that continues growing. The fact that Best Buy revenue growth is slowing down doesn't bode well for them long term. If their margins compress and sales decline, it's only a matter of time before they see the same fate as Circuit City. There business model has become a show room for Amazon. The only way Best Buy can turnaround is if they address this problem. My bet is that they can't do it. In my opinion, I actually think it would benefit both companies if Amazon buys out Best Buy only if the price is right.

  • Report this Comment On April 07, 2012, at 3:24 PM, CrowdKnowsBest wrote:

    Best Buy has invested a lot of money into the Geek Squad piece of their company. Best Buy can survive with compressed margins as long as they can jack up the price of Geek Squad service. I would say it is a good move for them to sell cheaper products, that would break more often, eventually funneling more business to the Geeks.

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