4 Reasons Best Buy Will Move Even Lower

Even before its fiscal second-quarter earnings release yesterday, electronics retailer Best Buy (NYSE: BBY  ) had disappointed shareholders. Put kindly, the naming of new CEO Hubert Joly on Monday did not impress. Though Joly begins his role with Best Buy in early September with loads of executive experience, none of it includes retail.

Unfortunately, the new CEO is only one of many reasons Best Buy's recent share-price decline is a precursor of things to come.

First, the results
Missing already low expectations hit Best Buy stock prices hard. Earnings of $0.20 a share for fiscal Q2 of 2013 are about half last year's results. Those earnings also don't include a $91 million restructuring charge for store closings. Add in the one-time item, and it's really ugly. Either way, the results are way off even the kindest of analyst estimates.

Same-store sales continue to disappoint, dropping 3.2% in all markets, including a "mere" 1.6% in the United States. Operating income isn't even in the same neighborhood, with or without taking the one-time charge into account. Not surprisingly, Best Buy put a halt to the share-buyback program for at least the balance of this fiscal year.

Unfortunately, as bad as it is, there's more of the same on the way for Best Buy. Here's why.

Timing is everything
Reason No. 1: Is it even possible to pick a worse time to name a new, inexperienced (in your industry, that is) CEO? A day before announcing historically poor results, Best Buy introduced shareholders to Joly. Noted as a turnaround specialist, Joly has no retail experience, and investors were not amused. The Aug. 20 announcement initiated a sell-off that ended with the stock down 10%. One can only assume Joly nailed the interview.

Silence is not golden
Reason No. 2: Don't expect earnings guidance for the balance of fiscal 2013. The reasons for the new policy are a new CEO, "uncertainty associated with several key product launches," a difficult home-electronics market, and tough conditions internationally. Circling the wagons during a difficult period makes sense, but with the bevy of negative news, the decision -- and the timing of it -- is worrisome. As a publicly traded company, it's not unseemly for shareholders of said company to have certain expectations, and getting a feel for what to expect from Best Buy the balance of the year is not unreasonable.

One less alternative
Reason No. 3: With founder and ex-CEO Richard Schulze presumably out of the takeover picture, there's no white knight on the horizon. Not that Best Buy was actively seeking suitors, but competing with traditional retailers like Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) , both with stronger financials and diversified product lines, requires drastic measures. Add online juggernauts like $108 billion Amazon.com (Nasdaq: AMZN  ) to the competitive mix, and Best Buy is in dire need of a savior.

About that dividend
Reason No. 4: As of a quarter ago, income investors took solace in the nearly $1.4 billion in cash on Best Buy's balance sheet. Why? Because that meant the 3.8% dividend yield was intact, and relatively safe. No longer. The precipitous decline in cash and equivalents, to $680 million, brings into question how long Best Buy can continue earning $0.04 per diluted share and paying a $0.16-per-share dividend.

Bad news is about the only news Best Buy shareholders have heard for some time now. If you're on the sidelines, stay there. If you're an owner, consider passing that responsibility on to a willing buyer -- it's going to get worse before it gets better.

Yeah, Best Buy is having a tough go of it, and it will for the foreseeable future. But there are other retail alternatives worth taking a look at. One particular company that our chief investment officer deemed "The Motley Fool's Top Stock of 2012" is available in our exclusive special report. Claim your copy of this limited-time research report.

Fool contributor Tim Brugger currently holds no securities positions, including any 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. We Fools don't 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. The Motley Fool has a disclosure policy.


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