It's the most critical time of the year for Best Buy (BBY 0.72%) as the retailer enters the quarter, that, according to analysts' estimates, provides more than two-thirds of the company's annual profit (compared to less than half for competitors like Wal-Mart (WMT -0.05%) and Target (TGT 0.72%)).
Already at nearly four times where it was trading last December, Best Buy's stock has surged this year. This is especially noteworthy considering the low hopes from most analysts as the company continued shutting down stores and losing sales to its competitors, such as Amazon.com (AMZN 2.17%). Still, with major changes throughout the year, the retail giant defied the odds and finds itself at a multiyear high. Yet can investors look for the same success this holiday season?
Success in the fourth quarter is absolutely essential for Best Buy to prove itself worthy of its enormous stock jump. Despite the massive year for the stock, the numbers haven't really backed up such a move. Figures like the declines in same-store sales growth the last two quarters, while important, shy in comparison to fourth-quarter numbers, as this is what Best Buy relies on for so much of its annual revenue. That said, let's look at how Best Buy is poised for the fourth quarter.
Tech disadvantage
Best Buy's brick-and-mortar retail competitors like Wal-Mart and Target tend to use consumer electronics as a "loss leader" in the fourth quarter, meaning that they understand they will most likely take a loss on consumer electronics (they make very small margins on the most popular items, like Apple products). They hope, however, that the electronics can attract customers to the store to purchase other items that they expect to make a profit from.
Unfortunately, Best Buy does not have this luxury, as it deals exclusively in consumer electronics. And, while some have high hopes with the release of new consoles such as the new Xbox One and new Apple products, these items deliver very small profit margins for Best Buy.
Actually, it's possible that the releases could potentially even be bad news, given that the expensive consoles could cause a crowding-out effect, meaning that consumers could want to spend less on other consumer electronics at Best Buy after buying such an expensive device.
Help from Samsung and Microsoft?
While the announcement and rollout of Microsoft's "Windows Stores" and Samsung's "Samsung Experience Shops" have generated hype, their effect may not be as drastic as many assume. Yes, they may attract more people into the store, but do they really have the potential to increase Best Buy's earnings enough to the extent they can match share-price growth? Don't get your hopes up. And don't forget that the company is giving up its own floor space to make room for the shops, limiting the potential revenue increase as a result of the move.
Online sales and price-matching
Two of the saving graces for Best Buy in the competition with Amazon could be its price-matching and online sales. One of the biggest issues the retailer has faced in recent years is showrooming -- consumers coming to the store to inspect and compare products in person and then retreating home and buying them for much cheaper from websites like Amazon. With price-match, however, Best Buy has taken the first step to conquer the problem.
Plus, with a revamped website and the ability to order a product into the store for pickup in as little as a day and with no shipping costs, a feature both Wal-Mart and Target share, it is becoming easier and quicker in some instances to shop at Best Buy online than Amazon. Does all of this stack up enough to allow Best Buy to take over the online consumer-electronics business from Amazon completely? Obviously not. But it is definitely the right start.
Foolish bottom line
A blowout second quarter and a disappointing third quarter become nearly irrelevant in comparison to the importance of this fourth quarter for Best Buy. Can the company put up the numbers to back up its recent stock jump? If not, investors may feel that much of the hope for Best Buy was just hype.
It's shaping up to be an incredibly competitive season in the consumer-electronics industry, and while companies like Amazon seem to be a safe bet for the holiday season, don't count Best Buy out just yet. If it can make the most of the fourth quarter, it will make investors very happy.
