Why Best Buy Stock Might Sink Your Portfolio

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Saying that Best Buy (NYSE: BBY  ) stock has had an impressive run so far this year is a gross understatement. The stock has gained more than 119% year to date, compared to a return of just 10% for the broader market. However, don't let the stock's rally deceive you into thinking Best Buy's turnaround plans have gotten off without a hitch. Current shareholders of Best Buy stock should be careful, lest the stock come crashing back to reality.

A tight fix
Earlier this week, Best Buy stock hit another 52-week high after the company agreed to sell its 50% stake in Best Buy Europe to its joint venture partner Carphone Warehouse Group. The cash and stock deal is valued at about $775 million. The deal should help fund Best Buy's turnaround effort, though it's still a loss on investment for the company given its original buy-in five years ago for $2.15 billion. Meanwhile, Best Buy faces no shortage of complications back home.

Amazon's low prices, convenient platform, and speedy shipping have made Best Buy's big box retail strategy all but obsolete. In a late bid to counter comparison-shopping, Best Buy started matching online prices. However, showrooming is the least of Best Buy's worries at this point. In addition to online competition, the consumer electronics chain also faces shrinking margins, declining sales, and deteriorating profitability.

Walk the talk
Let's be clear: Best Buy stock is still a hot mess. Only now, the symptoms are masked by the current recovery in its share price. Amazon and other online retailers meanwhile have lower cost structures, which give them an undying competitive edge over Best Buy -- even as the electronics retailer downsizes stores and reduces its workforce.

Fluctuations in Best Buy's stock price have helped mask the underlying dysfunction in this name. To be sure, Best Buy still faces many live-or-die challenges on the road to recovery. Moreover, the increasingly competitive retail landscape is no friend to a company such as Best Buy, which lacks even the slightest moat. Exceeding the market's low expectations may have helped Best Buy stock climb out of the gutter, but the company's future remains far from certain.

Make no mistake, the brick-and-mortar versus e-commerce battle wages on, with Best Buy stock caught in the middle. After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. How will new leadership perform? Will old leadership take the company private? Will a smaller store format work out for both the company and its brave investors? Should you be one such brave investor? To help answer all these questions, The Motley Fool has released a new premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report today.

Read/Post Comments (4) | Recommend This Article (3)

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  • Report this Comment On May 03, 2013, at 10:40 AM, RoscoePColetrane wrote:

    "Amazon's low prices, convenient platform, and speedy shipping have made Best Buy's big box retail strategy all but obsolete."

    Best Buy matches Amazon's prices, Best Buy also has a "convenient" website to conduct purchases and what's speedier than walking/driving to a Best Buy store and picking up a product immediately?

    Further, Best Buy's "obsolete" multi-channel distribution network (purchase on website and pick up at store) is being emulated by Amazon as it rushes to open more and more "distribution" centers.

    Sure Best Buy's profit margin is weak at -0.98% but - guess what - AMZN's isn't much better at -0.14%. And Best Buy's operating margin of 2.55% is a little better than Amazon's at 1.04%.

    So with just do you justify Amazon trading at a 40x EBITDA multiple and BBY at only 4x EBITDA?

    Is it the decline in AMZN's revenue growth from 36% in 1Q2012 to 22% in 1Q2013?

    Moreover, its convenient that there is no mention whatsoever of the upcoming (inevitable) implementation of the Marketplace Fairness Act that will level the playing field between on-line retailers and brick & mortar businesses. How do you think that will impact sales at AMZN when their unfair tax benefit is eliminated?

    Perhaps the author should have started her article with the ending disclaimer:

    "Fool contributor Tamara Rutter owns shares of The Motley Fool recommends The Motley Fool owns shares of" we can prepare for the bias before we begin reading?

  • Report this Comment On May 03, 2013, at 12:00 PM, mistacy wrote:

    Amazon & other e-tailers support the "Marketplace Fairness Act". This doesn't help BBY make up for poor customer service & inconvenience of lack of inventory. BBY just not allow its customers to shop as fast & as much as Amazon does. Be honest with yourself. You can't buy a book about stock market, a business suit, & a computer within just a few minutes walking around a Best Buy store. Well that my friend is what Amazon offers. This is not a war between BBY & AMZN... It is about business & who offers the product & service which is more convenient than the competitor. As far as I am concerned BBY is not the place for product & service.

  • Report this Comment On May 03, 2013, at 2:23 PM, a367572 wrote:

    I've said I before, Amazon is good for those little purchases, but there is no way I'll risk buying a large item. Rather buy my new led panel at a box store. Easy to try out exchange if I like. Service is better. Who at Amazon can I talk to?

  • Report this Comment On May 13, 2013, at 11:44 PM, youareafool24 wrote:

    First I got to point out although everyone complains about bad customer service normally their perception is a little off. Let me just point that out right there. Usless you had 50 interactions with a company and there were all bad, give some companies some slack, its really hit and miss. Why? Thats because people lie to get jobs and its hard to get them fired after. Look back at jobs you have had and coworkers you worked with. Tell me you have never worked with someone who stole, cheat, lied, did bad customer service or should have been fired. I work with them more then I want and these people face customers. Therefor one or two bad experiences are bound to happen. Why? Again its hard to get people fired because they don't get caught doing that stuff. Now as for Amazon, I have had products from amazon that have had problems and it has been a pain. Any Brictor and Mortor swould have an easier time returning items in their time period versus Amazon. Oh if you have a minute read Better Business Bureas complaints for Amazon, Target and Best Buy. You will notice that all three have had issues with customer service and it's interesting to see that with Electronics is normally the same issue for all three stores. In all, give shops a couple chances, and choose the best bargin to save you money.

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