Please Put Best Buy Out of Its Misery

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Remember when Best Buy (NYSE: BBY  ) was an Wall Street darling? The consumer electronics giant would wow investors quarter after quarter. Its superstores were always buzzing with people. It would trade confident smirks with Circuit City a few blocks away.

Well, that snapshot continues to fade.

The latest round of bad news out of Best Buy finds the company shaking up its corporate ranks as it paints a gloomy picture of its latest quarter.

Best Buy is doing away with its most senior layer of management. In a move to streamline operations, both the president of its U.S. business and the executive vice president of its U.S. operations will be leaving the struggling retailer.

The shakeup isn't the problem. The company isn't paying Hubert Joly a ton of money to admire the glistening iceberg as the Titanic sinks. Skeptics can argue that it's ironic that Best Buy was shelling out pointless retention bonuses to dozens of managers with no ties to actual performance -- only to shake up the Magic 8 Ball again -- but that's not Joly's fault. He wasn't even there.

No, the real problem here is that Best Buy is sinking.

The retailer is warning that comps for the current quarter that ends next week will be negative. Best Buy is saying that it will be consistent with the rates posted earlier in the year, as comps slipped 5.3% during the fiscal first quarter and 3.2% during the following quarter. Its gross profit will also shrink. The only thing that doesn't appear to be shrinking is the company's SG&A costs. Go figure. The result is that adjusted earnings will be "significantly" below the $0.47 a share it earned a year ago. Something tells me that we're looking at something far worse than the $0.36 a share that analysts were targeting before Wednesday night's release.

What can Best Buy do? It can't match's (Nasdaq: AMZN  ) lean operating structure no matter how many layers Joly slashes, so it will never be able to offer competitive prices. Following RadioShack (NYSE: RSH  ) into small-box stores specializing in wireless sales -- Best Buy Mobile -- won't work. RadioShack took another hit this week after posting a quarterly deficit that was twice as large as analysts were forecasting.

The only way out rests in booted founder Richard Schulze's ability to round up enough private-equity firms to take Best Buy private, but it seems highly unlikely that he'll be able to talk smart investors into taking a chance on Best Buy's unwinnable model. A buyout certainly doesn't seem likely in the mid-$20s, as Schulze originally suggested this summer.

However, Best Buy needs to get a deal done and put retail investors out of their misery. This story isn't getting any better, and now the chain is just embarrassing itself.

There's no Circuit City to throw a confident smirk at anymore, and Best Buy needs to know it's holding a bad hand.

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. It's a gutsy call now, but I'll stick with it on paper. I wouldn't short Best Buy with real money.

If you want to play nice with the trends that will pay off in the future, forget Best Buy and begin reading up on Amazon. In our new premium report, we'll tell you what's driving the company's growth, and how to know when to buy and sell Amazon. Our report also has you covered with a full year of free analyst updates to keep you informed as its story changes, so click here now to read more.

Longtime Fool contributor Rick Aristotle Munarriz has no positions in the stocks mentioned above. The Motley Fool owns shares of, Best Buy, and RadioShack, and is short RadioShack. Motley Fool newsletter services recommend and Best Buy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (2)

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  • Report this Comment On October 25, 2012, at 1:50 PM, dragonmaster123 wrote:

    it will be very sad if best buy goes under. it's not that great buying off the internet. I do, but I've had some defective products that have been a hassle to return. The shipping costs wipe out any savings. I pretty much just buy what I can't find in the store. Who really wants to buy a tv online? If it breaks it will cost a fortune to ship back and I never really liked the thought of a $2000 tv sitting in front of my house till I get home from work. Who will be the showroom if best buy goes bankrupt? Best buy is easy to return items too and they don't exactly price gouge. Yes it costs a little more than Amazon, but it's worth it to me to be able to return it and get an immediate exchange if it breaks.

  • Report this Comment On October 26, 2012, at 1:21 AM, herky46q wrote:

    I like Best Buy. To constantly read gloom and doom is no fun. Will Amazon build brick and mortar stores to replace them?

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