3 Reasons Best Buy Is Better Than You Think

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Sometimes the idea that a company is in trouble becomes so prevalent that investors forget to check the facts. Best Buy (NYSE: BBY  ) has been the target of many articles in the last few years suggesting that the company was on its way to becoming the next Circuit City.

This sounds so logical... (NASDAQ: AMZN  ) has been named as the most likely destroyer of Best Buy. Ironically GameStop (NYSE: GME  ) could be one of Best Buy's biggest problems that no one sees coming.

In theory, Amazon is a more efficient operation and can offer better pricing than Best Buy...and far more choices. With more than 65% of Amazon's sales from electronics and merchandise, the company's business is still more about goods than services. With domestic sales increasing by more than 30% over the last several quarters, there is little doubt that Amazon is growing faster than its competition.

One of the bigger stories in retail in 2014 could be the new game consoles and new game releases. With billions of sales for both new consoles, and hit games reaching more than $1 billion in sales in just their first few days, Best Buy needs to capitalize on this positive development. However, the retailer that seems to be the de facto beneficiary from this new console cycle is GameStop.

GameStop saw same-store sales increase by more than 20%, and the release of Grand Theft Auto V was a big factor behind this significant increase. In theory, GameStop offers something that Best Buy has a hard time matching. The company offers knowledgeable employees who know the ins and outs of gaming better than traditional retailers.

It's the people in blue that matter most
The first reason Best Buy is stronger than some think is the company has an army of men and women in blue that argue well for Best Buy's future.

For those who believe that Amazon will kill Best Buy, just visit a local Best Buy and listen to some of the conversations between customers and employees. Best Buy employees are sought out for advice and knowledge about computers, mobile phones, games, and electronics of all types.

Amazon can't hope to match this experience, as customers are on their own to discover the best options to meet their needs. While GameStop employees may have more game-specific advice, the company's lack of floor space makes matching Best Buy's selection near impossible.

It's a showroom and that's a good thing
The second reason Best Buy is stronger than some think is the company has accepted its showroom status and is making the most of it. The company is fighting the pricing battle by matching prices with Amazon, Target, and Wal-Mart.

Best Buy's price matching is putting pressure on the company's domestic gross margin, which stands at less than 24% in the current quarter. While Amazon and GameStop carry higher gross margins at 27% and 28%, respectively, Best Buy's price match is beginning to turn sales around. For example, the company's domestic same-store sales increased by nearly 2% compared to a 4% decline last year.

In addition, Microsoft, Samsung, and Apple are all vying for prime placement in Best Buy stores, putting some of the biggest guns in the business in league with Best Buy. More importantly, Microsoft and Samsung are training and staffing Experience Stores in Best Buy. This crew of experts should also improve the quality of service provided by the men and women in blue as well.

Many ways to connect
The third reason Best Buy is stronger than many might expect is the company can connect in more ways and more effectively than its competition. With around 900 big-box stores and hundreds of Best Buy Mobile locations, the company has plenty of physical locations to engage customers.

Best Buy has consistently reported at least 10% annualized increases in online sales, and there is something Best Buy can offer that Amazon and GameStop can't match. The company offers online orders delivered to a local store, which Amazon can't do. The company can also ship from its stores to customers, which is a challenge for GameStop.

Many physical retailers are beginning to experiment with this store-as-a-warehouse concept. Though GameStop has more than 6,000 locations, each location is significantly smaller than the average Best Buy. This smaller presence makes using these locations as shipping points impractical.

With improving sales, better service due to the showroom representatives, and more ways to connect with customers who need advice, Best Buy is stronger than many think.

Shop at Best Buy recently? Why not use this experience to your advantage?
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Read/Post Comments (3) | Recommend This Article (1)

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 January 12, 2014, at 11:58 AM, ShawnMichaels wrote:

    Gamestop employees don't know anything. All they know is how to push you into buying protection warranties, pre-orders and pushing you to buy their used games which make them more money. I like best buy because they usually leave you alone and only ask if you need help, not if you want to pre-order the next years worth of games which is an interest free loan for them. Knowledgeable? Gimme a break. Their stores are too small and rely a lot on used game sales which are going to decline as people get more into digital. The small stores affect how much inventory they can sell. Yeah these new consoles came out but gamestops would only cary 10 to 15 of each while best buy had 50 for those who didn't pre order.

  • Report this Comment On January 13, 2014, at 2:43 AM, marder1 wrote:

    BBY staff is knowledgeable and helpful, I don't feel like I'm throwing money into the ether and hoping the 2% I saved is justified, it only takes a couple purchases to get screwed up before AMZN "advantage" melts like ice cream in the sun. ESPECIALLY because I now can order on my laptop, and pick up the merchandise almost instantly at any BBY store, walk over to the GEEK squad, and get it tested.

    Whether this advantage caught on this particular XMAS isn't material, for things I buy, I want a human being at the end of that trail, unless I am streaming music or videos. And BBY has already dropped from $44 peak to $38 today, 15% off its high, so even if margins are shrinking, and gross is so so, I say give that buy on line, pick up store ritual a shot.

    XMAS is gone, that experience is not.

  • Report this Comment On January 16, 2014, at 1:01 PM, MikeZ wrote:

    Chad, Thanks for the article. Regarding your 3rd point, please elaborate a bit more. I am not clear why you consider the many small GameStop stores as not being practical for being shipping points. It almost seems like a contradiction in that you see the many BestBuy locations as an advantage. What am I missing?

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Chad Henage

Chad is a self professed tech nerd and has been investing for over 20 years. He follows nearly everything in the technology and consumer goods sectors, and is a huge fan of the Peter Lynch investing style. He has over 1,000 published articles about stocks and investing. You can follow Chad on Twitter at @chadscards1274.

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8/27/2015 4:00 PM
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