3 Reasons to Like Best Buy

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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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Read/Post Comments (3) | Recommend This Article (2)

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 20, 2014, at 12:23 PM, regotoguy wrote:

    Sears and Radio Shack are not competitors. AMZN and WMT are. I was always skeptical of BBY's plans. I actually shorted the stock at $42 and covered way to soon at $38. That was my mistake. As far as buying the stock now, I wouldn't. I don't like their plan of trying to keep up with WMT and AMZN. That is a losing battle and terrible business plan. Kmart tried to keep up with TGTs pricing and they ended up going chapter 11 several months later. I am not saying BBY is going 11 anytime soon, but it is losing battle and awful business approach. BBY needs to differentiate themselves. They need a reason why customers would pay a higher price in their stores than their competitors. That should be the focus. Not trying to match price when they can't. The way they can do this is by offering 100% in house financing like Conn's, but they better be real good at monitoring their customers ability to pay. Another method could be in the service related area, something AMZN can't offer and WMT may not be ready to offer. I would refrain from purchasing stock until the dust settles. I wouldn't consider buying until the price drops to $20 or lower.

  • Report this Comment On January 20, 2014, at 1:52 PM, GudDanMan wrote:

    Unless Best Buy can take some really aggressive steps in a new direction, its a slow road to nowhere. I think that the best thing they can do is get out of the way of TGT, WMT, AMZN. There is no way to compete with WMT. The Samsung display they now have is a start, and Google even better, but quite honestly unless they add a dollar store, a gift shop, frozen foods, oranges... something I would never buy online, they are toast. Best to keep quality stuff and support and move on to growth markets. Even sophisticated coffee would get me in there, but very rarely electronics. Locally we are shortchanged by supermarkets, meaning there are tons of product that does not make it to the shelves, even at WholeFoods. I think this is a direction BestBuy can grow on. One other answer, go private...get acquired and stop competing with WMT & TGT become a subsidiary of them.

  • Report this Comment On January 21, 2014, at 1:17 AM, JaredPorter wrote:

    It seems like the potential demise or contraction of Best Buy would be disastrous for Samsung, Dell, HP, Sony, Google's Netbooks, Nikon, Canon, Sling box, Beats, and many others. Steve Jobs knew that he needed a storefront where customers could hold the product, obtain information/demonstrations, seek technical assistance and repairs, and see the personal/helpful/friendly face of Apple. Without a demonstration, who is going to likely purchase a Galaxy Gear without ever touching one? Microsoft HAD to buy Nokia to SAVE their mobile phone prospects. Similarly, Google and Samsung may have to team up and buy Best Buy to save their hopes of having a quality physical retail presence.

    The manager of Microsoft Retail Division can show Samsung/Google how hard it is to start their OWN brick and mortar from scratch.

    Apple was BOLD and smart (because it all worked out splendidly) to fortuitously jump into retail stores when it did. That was very pioneering, but Apple studied it and did it right. (no commission salespeople, the Genius bar, expedited payment and checkout, in-store pick up, the in-house seminars, the children's table, the quality locations, architecture and furnishings (e.g., importing the special wood for the display tables from Japan!!!).

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Sam Mattera

Sam has a love of all things finance. He writes about tech stocks and consumer goods.

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