Best Buy Stock Will Only Break Your Heart

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Investors are loving Best Buy (NYSE: BBY  ) these days, but can the same be said about its shoppers? Best Buy stock may be one of this year's biggest winners, but the news isn't likely to be as upbeat when the struggling consumer-electronics chain reports on Tuesday.

Best Buy stock hit a new high this week, and the shares have more than doubled this year, but don't be fooled by a pretty stock chart. Best Buy still has some pretty big problems.

Analysts see Best Buy earning $0.25 a share during the fiscal first quarter ending in April, roughly a third of the $0.72 a share it posted a year earlier. Revenue is expected to decline by 8%. This certainly doesn't seem like a company on the upswing.

Bulls will point to positive comps during its most recent holiday quarter, but Best Buy had to sacrifice plenty to arrive at the meager 0.9% same-store-sales growth. Gross margins contracted slightly, and marketing costs spiked as promotional activity picked up to woo traffic.

Oh, and let's not make the false assumption that the typical Best Buy store rang up more sales this holiday season than it did last year. There's a little more to that 0.9% increase than meets the eye, because Best Buy includes its 11% spike in online orders in calculating comps. It's a sneaky yet legal trick that way too many retailers are doing these days, and the impact was heightened here because Best Buy shuttered 49 of its superstores early last year. In other words, we had fewer stores for these sales to be misleadingly divided into. Back out the Internet sales contribution, and comps would have been slightly negative.

There's also that 11% increase in online revenue itself to frame correctly. (NASDAQ: AMZN  ) -- Best Buy's showrooming nemesis -- saw its net sales soar 22% during its holiday quarter. Best Buy actually continues to lose ground to the leading online retailer by growing its sales at half of Amazon's clip.

Do you fancy a little more doubt in your skepticism casserole? Well, let's turn to how things will play out through the next few quarters. A few years ago, Best Buy would sell a ton of DVD players, video game consoles, and CD players during the holidays. Then shoppers would flock back to buy new media releases. Well, all of those categories are fading at Best Buy. Smartphones and tablets were the big positive drivers during the holidays. Once you buy any of those and get locked into those digital ecosystems, there's no need to keep coming back to Best Buy.

Junk food
Tuesday's report doesn't have to be a disaster. An improving economy could help mask the downward spiral. However, investors are using a lot of poor judgment this year. RadioShack (NASDAQOTH: RSHCQ  ) -- which is in worse shape than Best Buy and has made an even bigger bet on mobile retail -- has seen its stock nearly double in 2013, even though losses are widening and sales are shrinking.

So ask yourself why these seemingly hopeless consumer-electronics retailers are rallying. They will never return to what they used to be in this age of digital delivery. Performance isn't really improving. Stock charts may not lie, but they are drawn by investors who sometimes don't know any better.

Best Buy stock will only break your heart in the end.

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  • Report this Comment On May 19, 2013, at 1:44 PM, RoscoePColetrane wrote:

    Joly is making a number of significant improvements to BBY that the author overlooks.

    He has implemented a permanent price-matching policy that - though it may impact margins - it should help it to recapture market share thereby reducing the impact of margin compression.

    How has it fared since it was introduced in the holiday season? AMZN growth rate in electronics in 4Q2011 (no BBY price match) was +51%. In 4Q2012 (with BBY price match), the growth rate in electronics was +24%. Coincidence? Doubt it.

    He was begun to aggressively shutter unproductive stores increasing shareholder ROA.

    He is aggressively taking advantage of his multi-distribution network by providing consumers the ability to buy on-line and pick-up in stores on the same day. Something that AMZN is desperately trying to emulate by opening as many "distribution centers" as possible. (Perhaps there is a need for brick and mortar after all?)

    In his productive stores, he has increased traffic and added an additional source of revenue by leasing space to popular CE manufacturers such as Samsung. I can only guess as to who is next...Microsoft? LG?

    Additionally, he has removed the vast space in the stores devoted to low margin DVDs and CDs and replaced it with high margin products such as mobile and appliances.

    He has begun to sell off his poor performing international operations that contributed to -6.6% same-store sales growth in 4Q.

    Will I wait to see how these policies transpire before I pass judgement? You bet.

    Will I pay 4.4x EBITDA and 0.18 price/sales for the BBY in thinking that Joly will succeed? Of course.

    What I won't do - however - is invest in AMZN at 43.6x EBITDA and 1.88 price/sales to receive a declining level of sales growth!

  • Report this Comment On May 19, 2013, at 8:24 PM, ezboxbreaks wrote:

    you've GOT to be joking right? after working (in upper management in that company for nearly over a decade i can tell you this:

    they treat their employees like absolute trash.

    their management tactics are DISGRACEFUL and unethical in most cases.

    the way their customers are treated are likewise just as bad if not worse.

    their services business has bled MILLIONS of dollars and is still to this day? WELL in the red.

    the bottom line here is?

    if you invest money in a company that can't make sound financial decisions? treats it's employees like total garbage

    treats it's customers worse

    can't manage money

    can't compete online to save it's life

    has no clue how to run a services business

    continually contracts by "laying off" as the ultimate answer every few years for their "over hiring mistakes" as a means to try to retain shareholders? this company is total garbage and they will be LUCKY to be around past the next 2 years.

    shady shady business practices and the same ole same ole from BBY (and yes hubert Joly isn't fooling anyone) he's just as bad as the rest.

    this company is the modern equivalent to chevy chase driving around big ben and parliament in european vacation... LOOK KIDS! Big BEN... Parliament.

    round and round it goes...

    sell your shares now while it's higher if you are smart. they won't be around very long.

  • Report this Comment On May 20, 2013, at 2:37 AM, RoscoePColetrane wrote:



    So those changes at BBY aren't actually happening, I just made them up, right?

    And BBY doesn't trade at a fraction of the valuation the AMZN commands for declining sales growth...that's a fabrication too, correct?

    All I've read are what appears to be some anecdotal allegations from a disgruntled former employee.

  • Report this Comment On June 21, 2013, at 10:13 AM, joejoe3 wrote:

    simply go into a best buy right now for the real answer. So much empty space.. All higher priced higher margin stuff... So many employees (up front no less) doing nothing/joking around.. only 1 person needed to man the register.. This is in an affluent area on a weekend..

    Shades of Circuit City.

    Shades of Blockbuster a few years after Hollywood video died.

    finally matching my amazon online price-- but I became dissatisfied with them 5 years ago when they wouldn't match my amazon prices. In my mind I always called this store "worst buy"-- they did the right thing too late. Myopic, greedy execs who want to hold on to their pie for as long as possible never make great business decisions until it's too late.

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