Please ensure Javascript is enabled for purposes of website accessibility

Is Best Buy's Loss GameStop's Gain, or Just More Pain?

By Rich Duprey - Mar 12, 2018 at 3:45PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Best Buy is closing its mobile phone stores, but it doesn't bode well for the video game retailer.

Best Buy (BBY -2.09%) is closing down its 257 Best Buy Mobile stores by the end of May, ending the consumer electronics superstore's foray into small retail locations, which began over a decade ago. Best Buy has found that the industry has matured, and with the broad proliferation of competition, it's simply become too expensive to operate these niche outlets.

Because the electronics retailer's big-box stores already include store-in-store boutiques dedicated to carriers and manufacturers like Apple, AT&T (T -0.38%), Samsung, Sprint, and Verizon -- and because Best Buy is adding more of these this year -- there's little reason to continue competing against itself with the stand-alone stores.

So Best Buy isn't exiting the mobile phone business, just consolidating it, and that should worry GameStop (GME -2.33%), which is hoping to turn around its own mobile phone business to help offset its declining gaming market.

Mobile smartphone

Image source: Getty Images.

Can't game the system

Although GameStop is best known for selling video games, under its Technology Brands division it also operates 1,500 stores under the names Spring Mobile AT&T, Simply Mac, and Cricket. The Spring Mobile stores sell AT&T branded wireless products, including its DirecTV satellite service, while the Simply Mac stores sell Apple products, from its smartphones to laptops and computers. The Cricket brand is the prepaid wireless subsidiary of AT&T.

This business has been struggling alongside GameStop's video game and console business, forcing it to take a $350 million to $400 million writedown this quarter, mostly attributed to the Technology Brands division.

The division had a horrible Christmas season, with sales plunging 19%, which it said was driven by limited availability of Apple's iPhone X and changes made by AT&T to the compensation structure in 2017. It also blamed a longer upgrade cycle -- as consumers kept their existing phones longer -- for the massive charge it was taking.

While Best Buy pulling out of stand-alone mobile phone stores could benefit GameStop in some fashion, the reality is that the competitive pressures identified by Best Buy remain, and the structural problems confronting GameStop haven't been eliminated.

No easy way to dial up growth

Best Buy has the benefit that it can easily fold its mobile phone business into its big-box stores. It's already selling phones there, and it can be business as usual as it integrates the inventory and employees into the existing structure. Not so with GameStop, which would have limited ability to absorb its mobile phone business into its game stores should it choose to do so, as they are tiny -- only 1,500 square feet on average.

Worse, GameStop has been counting on AT&T's merger with Time Warner going through so that it would have new products and services to offer customers, but after the Justice Department shot down the bid and with its related trial scheduled to start soon, the likelihood of that happening increasingly looks bleak.

Best Buy was on the ropes a few years ago, driven to the brink by and the showrooming effect of using Best Buy stores to test out equipment and then purchasing it via Amazon. Best Buy overhauled its policies and itself, and launched a risky but ultimately successful campaign of price matching that has dramatically turned its fortunes around.

Part of that success was driven by better use of its big-box stores, including the creation of the store-in-store feature that took advantage of space that had been poorly used before. Best Buy has now driven comparable-store sales growth in seven of the last nine quarters, and in the fourth quarter saw comps surge 9% year over year.

Best Buy's decision to close its mobile phone stores may very well drive further gains by bringing even more customers in, so you can't actually call the development a "loss" for the retailer. For GameStop, though, it may very well cause more pain.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
$68.52 (-2.09%) $-1.46
AT&T Inc. Stock Quote
AT&T Inc.
$21.09 (-0.38%) $0.08
Apple Inc. Stock Quote
Apple Inc.
$142.92 (0.96%) $1.36, Inc. Stock Quote, Inc.
$114.33 (0.73%) $0.83
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
$50.87 (-1.07%) $0.55
Sprint Corporation Stock Quote
Sprint Corporation
Time Warner Inc. Stock Quote
Time Warner Inc.
GameStop Corp. Stock Quote
GameStop Corp.
$117.43 (-2.33%) $-2.80

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/07/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.