Yesterday was rough for Best Buy (NYSE: BBY ) .
Shares of the consumer electronics retailer hit a nine-year low after it posted another disappointing quarterly report. It's only fitting that Amazon.com (Nasdaq: AMZN ) -- Best Buy's victorious rival and market share gobbler -- closed within 2% of its all-time high.
Investors shouldn't necessarily be surprised by the deterioration at Best Buy, but there were still more than a few surprising tidbits in yesterday's earnings release.
Let's dive right in.
1. Services revenue growth was essentially flat
A major part of Best Buy's turnaround strategy over the past year has been to push its growing fleet of services. Tacking on service contracts, extended warranties, and computer-related services -- as well as stepping up with product repair and delivery and installation for home theater, mobile audio, and appliances -- has become a priority given the high margins to be had there.
This was 7% of Best Buy's revenue a year ago. It's 7% of Best Buy's revenue now.
How can that be? Appliances along with computer and mobile are the only two categories growing at Best Buy. What happened to that well-advertised obsolescence insurance that rolled out last year? What happened to the training that would make employees more effective at selling these additional offerings?
There's nothing that Best Buy can do about the digital migration taking place with CDs, DVDs, books, and games, but that's an area where services don't factor into the equation. Best Buy is holding up in the areas where services count, but that line item just isn't moving the needle.
Are customers getting smarter or are they just fed up with the up-selling process?
2. Improvement needs some clarification
I'm going to take the line out of yesterday's release that left me shaking my head in disbelief. Let's see if it hits you the same way:
"Domestic comp store sales decline of 1.6 percent improved compared to fiscal first quarter decline of 3.7 percent."
Was this past quarter really improved? Stateside comps still took a 1.6% hit. If a store sells $100 one quarter and then it sells $98.40 a year later that is not improvement.
3. China's doing worse than the U.S. for Best Buy
Investors associate heady growth with retail in China. E-tailer Dandang (NYSE: DANG ) posted a 53% top-line surge in last week's quarterly report. Earlier this month, Chinese online discounter Vipshop (NYSE: VIPS ) saw its sales soar 234%.
Things aren't as rosy with Best Buy's bricks-and-mortar appliance retailing business in China. The company suffered an 8.2% slide in international comps, worse than its 1.6% domestic dip. Best Buy's international business covers Canada and Europe, but its Five Star chain of appliance stores is also in trouble.
Best Buy blames "lower growth in consumer spending in China" for the malaise, but the country's economic growth -- unlike Best Buy's performance -- is still positive.
4. There's irony in the buyback suspension
It's been widely reported that Best Buy is holding off on stock repurchases until the new CEO migration plays itself out this fiscal year.
However, it still bears pointing out that the company bought shares at much higher prices over the years. But Best Buy isn't going to buy back its stock here in the high teens, and it seems to have rebuffed founder Richard Schulze's efforts to buy all of Best Buy out in the mid-$20s.
Best Buy is not a good buy
I entered a bearish CAPScall on Best Buy in Motley Fool CAPS last year. 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.
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