Is Best Buy Stock a Sucker's Bet?

Best Buy's (NYSE: BBY  ) stock has recovered nicely in 2013 after a dreadful 2012. Better-than-expected results in the first quarter had a lot to do with that and the stock is now near a 52-week high.

If the market didn't have such low expectations, the numbers would be less than impressive. First-quarter domestic revenue fell 9.6% to $7.98 billion and international revenue dropped 9.6% to $1.4 billion.

BBY Total Return Price Chart

BBY Total Return Price data by YCharts.

The only thing saving Best Buy from reporting a larger loss than $170 million was an effort to cut stores and operating expenses.

Is the strategy change working?
Best Buy is slowly moving to a smaller store format with most of those being mobile-centric stores. The hope is that the company can sell everything from smartphones to tablets and the service agreements that go along with it.

If this sounds familiar, it's because it is. Verizon, AT&T, T-Mobile, and Apple all have their own stores in similar locations where Best Buy will be located. The advantage is that consumers can browse Apple, Samsung, Nokia, and other manufacturers and shop plans from Verizon Wireless to Virgin Mobile

It'll take some time to determine if the strategy is successful, but I can't imagine how it will be. Best Buy is competing with similar shops in malls and isn't a destination in mobile. How is that a differentiator long term?

Can Best Buy offer something different?
As a consumer, the question I have is: Why should I go to Best Buy? I buy music and movies online and I'm at Target (NYSE: TGT  ) regularly where I can pick up random electronics or even a TV. Amazon fills most specialized needs and appliances aren't frequent purchases for me or most people. So, why would I go to Best Buy?

One answer might be for services that would be difficult to perform on your own. Geek Squad fixes computers, something I could never do on my own. Experts in entertainment systems could help design a television and sound system better than I could, but I'm still not paying more than I would online. Best Buy isn't leveraging the service side to draw in customers either, choosing smaller-format stores in mobile to fill sales. I've suggested in the past that Best Buy combine the next generation of electronics -- including solar energy and electric vehicles -- and the services around them as a differentiator, but that doesn't appear to be the company's plan. 

When you look around retail, other companies have a differentiator over Best Buy. Target and Wal-Mart (NYSE: WMT  ) offer a variety of products including electronics and groceries for one-stop shopping. Amazon Prime users can get free shipping on nearly anything that's made. There's not the same draw for Best Buy.

Better buys in retail than Best Buy stock
One of the ways to look at Best Buy's struggles is through its cash flow from operations vs. competitors'. You can see in the chart below that Best Buy's operational cash flow has fallen off a cliff over the past four quarters while Target and Wal-Mart have remained very steady. 

BBY Cash from Operations TTM Chart

BBY Cash from Operations TTM data by YCharts.

When I look at the fact that Best Buy is struggling strategically, it doesn't have a consistent draw to its stores the way Target and Wal-Mart do, and its cash flow is plummeting, I think the discount retailers are a better buy. 

Foolish bottom line
I think Best Buy is dying a slow death unless it finds a way to differentiate itself in retail. Services could be that differentiator, but right now the company isn't leveraging that well enough and it's led to a rapid decline in profits and cash flow. That makes the stock a bad buy long term. 

A deep dive into Best Buy stock

The brick-and-mortar vs. e-commerce battle wages on, with Best Buy 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 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 premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report today.

 


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 18, 2013, at 1:27 PM, RoscoePColetrane wrote:

    Thanks for the rear-view mirror synopsis.

    Cash flows from operations declined from late 2010 through late 2012? You don't say.

    What other pearls of wisdom are you going to share with us?

    Perhaps that the stock fell from ~$45 to under $12 during that time period as a result?

    How about you highlight forward expectations instead? That might be a little more useful. Consensus estimates assume:

    FY2014 EPS of $2.18, up 30% from FY2013

    FY2015 EPS of $2.35, up 8% from FY2014

    Perhaps that may explain some of the rebound in the stock price.

    Differentiation?

    It's not enough to carry the widest selection of today's consumer electronics or to open stores-within-a-store where BBY now collects rent from CE manufacturers to highlight their products while driving traffic and sales...you want them to start to sell toiletries and baked goods?

    Ha. Most us prefer to buy our state-of-the-art TVs outside of stores where suburban housewives buy their toilet paper...

  • Report this Comment On June 18, 2013, at 1:40 PM, reww1234 wrote:

    I agree with Roscoe, must be another motley amazon bull.....

  • Report this Comment On June 18, 2013, at 6:50 PM, kojak200 wrote:

    Best Buy has a bad business model. Sells major hardware at or below cost. Has to sell warranty plans to generate profit and mark up cables and add-on stuff a ridiculous amount. It wont go out of business tomorrow but will stay in a steady decline for years. Wouldn't get too excited about the stock, HH Gregg stock has actually outperformed BBY in same time period and that's another struggling retailer. Go figure!

  • Report this Comment On June 19, 2013, at 3:14 PM, tundrowalker wrote:

    I think folks bought into Best Buy after hearing it would be a proxy Microsoft Store. Note that ATT, Verizon, Apple ... most large companies have their own stores ... everyone except Microsoft. MS was going to team with Best Buy to push more MS stuff. So, folks saw that as MS safety netting Best Buy for the time being. I think the quick rise of the stock is just speculaton-driven, not value-driven. If I had bought this stock when it was in the 10's, I would sell it at its current price. Doubling your money is nothing to sneeze about. But, there isn't much to say Best Buy is really going to be doing so hot with MS bolstering them. MS seems to be doing everything wrong these days, b/c they're too far out of touch with customers ... just as Best Buy is.

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