Why Best Buy Fell Apart

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Sometimes all your long shots come up short. For the past week, retailers from high to low have been falling to horrible holiday results and weak updates. The most recent failure comes from Best Buy (NYSE: BBY  ) , which ended 2013 on a high note. The company's stock was up more than 230% in 2013, but today it fell more than 25% after a bad holiday update.

Where Best Buy went wrong
In the company's third quarter, reported back in November, it posted a 0.3% increase in comparable-store sales. That was a glimmer of hope in a desperate world, and it showed investors that Best Buy still had some strong spots -- mobile and appliances did better than most in the quarter. The hope was that the third quarter was going to set the business up for a strong holiday season. No, that didn't happen.

Instead, Best Buy's comparable sales dropped 0.8% over the holidays. U.S. comparable sales were the company's weak spot, which was extra-bad news since the same stores had shown strength in the third quarter. Even worse than that, the company's mobile division had a weak showing. Comparable domestic mobile sales grew a meager 3.2%, compared to 6.7% growth in the third quarter.

The company fell prey to a hyperpromotional environment. As a result, Best Buy was forced to jump in with both feet to defend its market share. That ended up costing it profit on the bottom line, and the market hammered it for the shortfall.

The future of Best Buy
While the holidays were a disappointment, Best Buy is still in a better position now than it was at this time last year. The small comparable-sales increase in mobile and appliances were still increases, so Best Buy can still push its product mix agenda. In the holiday update release, the company also mentioned its commitment to its Renew Blue program. That plan is designed to get Best Buy back in the hearts and minds of customers, but it cost the company a decent amount as it chased low prices in 2013.

Overall, this is a major setback for Best Buy, but it's not the end of all things. The company built up enough momentum in 2013 so that it can still succeed in 2014. The challenge now is to keep customers coming through the door without having to rely on promotions all year long. I think it can make the transition, but it's by no means a given.

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Andrew Marder

Andrew Marder worked in retail for years, holding jobs ranging from bookseller to bank strategy analyst. He has worked for the Motley Fool since 2012, and loves coffee.

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9/2/2015 4:02 PM
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