3 Reasons to Like Best Buy

Best Buy had a terrible quarter, but all is not lost. Apple's commitment to retail suggests bricks-and-mortar stores have a future, while Best Buy's competitors, Sears and RadioShack, are also struggling.

Jan 19, 2014 at 10:15AM

Best Buy's (NYSE:BBY) holiday sales were nothing short of horrendous. Shares lost almost a third of their value on Thursday, after the company said its margins had been hit hard by aggressive holiday discounting.

Still, for long-term investors, there are a few reasons to remain hopeful. Apple (NASDAQ:AAPL) remains committed to its retail stores, while companies looking to replicate Apple's success, including Google (NASDAQ:GOOGL), could give Best Buy a boost. Meanwhile, Best Buy's competitors, including RadioShack (NYSE:RSHCQ) and Sears Holdings' (NASDAQ:SHLD) Sears stores, continue to struggle.

1. Apple continues to emphasize its retail effort
The worst-case scenario for Best Buy is a gradual slide into oblivion. Wedbush's Michael Pachter made the argument last week that big-box electronics retailers like Best Buy simply don't have a viable long-term business model. Over time, perhaps the next decade, Best Buy's sales will gradually taper off as more consumers go online. Ultimately, this might prove to be the case for Best Buy, but I think bricks-and-mortar still has a place in consumer electronics.

Apple obviously sees value in its retail stores. Last year, when its in-store sales dropped for the first time, Apple poached Burberry's CEO to lead its retail effort. If Apple believed everyone was simply going to be purchasing iPads and iPhones online going forward, it'd be winding down its operations and closing stores -- not dominating in sales per square foot.

And if bricks-and-mortar retail had no future in the consumer electronics space, Apple's competitors wouldn't be replicating its business model. That is to say, neither Samsung nor Microsoft would've made a deal with Best Buy to build their own mini-stores within larger Best Buy locations.

2. Google could sign a deal with Best Buy
That brings up second reason to be hopeful for Best Buy: the possibility that the retailer could sign a deal with Google. Best Buy's management has hinted that more vendor deals could be forthcoming, and Google seems like an obvious fit.

Although the search giant remains primarily a software company, Google has been expanding aggressively into hardware, and a deal with Best Buy (which has been rumored in the past) would make sense.

In addition to its Chromecast and its Nexus smartphones and tablets, Google now has Nest's thermostats and smoke detectors to sell. There's also a growing number of Chromebooks and, if the reports prove true, a forthcoming smartwatch and set-top box. Then there's Google Glass -- a product that demands a retail presence. Even before its release, Google Glass has generated a fair amount of controversy, and I wouldn't expect many people to buy it without first trying it out in person.

Google could decide to build its own retail operation instead of partnering with Best Buy, and if so, that would be terrible for Best Buy. But as Samsung and Microsoft demonstrated, partnering with Best Buy has its advantages.

3. Best Buy could be the last of its kind
Best Buy isn't the only bricks-and-mortar retailer struggling -- both Sears and RadioShack are on the ropes. But Best Buy seems to be in a better state than those retailers, and if they eventually go away, Best Buy could be the last man standing.

RadioShack has posted a solid string of earnings disappointments, most recently in October, when it reported a loss of $1.11 per share. Over the past two years, RadioShack shares are down nearly 80%, and some have begun to speculate that RadioShack could be forced into bankruptcy. My colleague Steve Symington points out that RadioShack still has hundreds of millions of dollars' worth of liquidity and could persevere for many more quarters.

Regardless, Best Buy is in a much stronger position than RadioShack, and If RadioShack's turnaround effort fails, Best Buy will face one fewer competitor in the electronics space.

Sears may not be such an obvious competitor, but it has an electronics department that sells a fair number of TVs and other big-ticket items that customers might otherwise go to Best Buy for. Historically, Sears has been known for its appliances -- one area where Best Buy is actually posting growth.

Like RadioShack, Sears, too, has been delivering a steady stream of poor earnings, and the company has been slowly selling off parts of its business to stay afloat. Even the investors who remain positive on Sears champion its real estate assets rather than its retail operation. Sears has been closing stores, and the fewer Sears stores in existence, the more likely it is that customers will go to Best Buy for their TV or washing machine.

Bottom-fishing in Best Buy
Best Buy shares had a crazy run in 2013 and, with the recent crash, are back to last spring's levels. If Best Buy's business is doomed, shares might still be expensive, but I don't think bricks-and-mortar electronic retailers are obsolete.

Apple's continued emphasis on its own stores suggests that a physical footprint is still necessary. With Google and others looking to compete, rival consumer-electronics companies have and could increasingly turn to Best Buy for a retail partner. As its weaker competitors fall by the wayside, Best Buy seems set up to dominate its space.

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Sam Mattera owns shares of Best Buy. The Motley Fool recommends Apple and Google and owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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