The house rules are simple in this weekly column.

I bash a stock that I think is heading lower. I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Best Buy (NYSE: BBY).

This is why the employees wear blue
I've been bearish on the consumer electronics superstore giant for some time.

The thesis is painfully obvious. All of that shelf space that you see at Best Buy dedicated to CDs, video games, DVDs, and books will continue to diminish every year. Digital delivery makes it so, and the sick twist here is that Best Buy is also selling the tools -- tablets, e-readers, PCs -- that will expedite the revolution.

Heck, Best Buy will gladly sell you a smartphone so you can download a free barcode scanning app to let you know how much the retailer is overcharging you on its merchandise relative to nimbler online rivals with leaner overhead.

Heading into this morning's quarterly report, I knew it was going to be ugly. I predicted it yesterday.

"I don't trust Best Buy," I wrote. "The past year has treated investors to year-over-year declines in profitability and same-store sales. Best Buy has come up woefully short on the bottom line in two of the past four quarters."

"I see nothing but pain for its bread-and-butter superstore concept," I added. "You don't want to be in this retailing niche when even Toys R Us is selling tablets and most forms of physical media are cutting out the bricks-and-mortar middlemen through the migration to digital delivery."

Well, the stock is opening sharply lower today after a predictably obvious bad quarter. Revenue grew a mere 2%, and Best Buy's adjusted profit after a one-time restructuring charge came in at $0.47 a share, well short of both the $0.54 a share it rang up last year and the $0.51 a share that analysts were naively expecting.

Best Buy does point out that comps rose 0.3%, breaking from its streak of negative store-level sales over the past few quarters. However, it needs to be pointed out that Best Buy bakes the 20% pop it had in online sales into its comps figure. Many retailers do this, incredulously enough. Despite the distortive tactic, a 0.3% gain in comps after last year's 3.3% decline, means that Best Buy was still doing better two years ago when we were in a recession. Oh, and the cost of holding up on the top line has come at the expense of butchered margins.

This isn't pretty, and it won't get prettier anytime soon.

Several of my fellow Fools -- many of them far more capable as analysts than I will ever pretend to be -- are still bullish on Best Buy. The value is certainly getting compelling at this point, but I just don't think it's a viable model anymore.

Consumers are finally too smart for Best Buy.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.

  • Amazon.com (Nasdaq: AMZN): I'm not always a fan of Amazon's decision to sacrifice near-term margins for the sake of growth, but I have to laugh when Best Buy considers a 20% surge in online sales a sign of success. Amazon grew its third-quarter sales (which ends a month earlier than Best Buy) by 44% and analysts see a 40% surge during the current quarter. In other words, BestBuy.com continues to lose market share to Amazon.com on a percentage basis and the gap is growing even larger on a dollar basis. An interesting nugget here is that Amazon's online sales will surpass all of Best Buy's sales next year ($65.1 billion vs. $52.5 billion, according to analysts that continue to underestimate Amazon and overestimate Best Buy).
  • Apple (Nasdaq: AAPL): One of Best Buy's rare smart moves has been to open smaller Best Buy Mobile kiosks, devoted entirely to wireless phones and accessories. Unfortunately, this strategy hasn't really been paying off for RadioShack (NYSE: RSH) in recent years. Wireless darlings are also opening more stores to reach out directly to customers, and no one does it better than Apple. How many folks clamoring for an iPhone will simply just go to Apple.com, visit an Apple Store whitewashed playground, or go directly through their carrier? Either way, if Best Buy wants to play small ball before it becomes the next Circuit City it will come at the sacrifice of its net sales -- and market cap. Cut out the middleman. I don't think Apple is as perfect an investment as many of its fans think, but I'd rather be parked there than in an emptying Best Buy parking lot.
  • Pandora (NYSE: P): Traditional retailers figuring that they could translate consumer success into digital music sales through their websites are faltering. Best Buy recently unloaded Napster, and Wal-Mart (NYSE: WMT) nixed its MP3 store this summer. Then we have Pandora, the leading music-streaming site that has surprised analysts with back-to-back quarters of profitability. It's hard to bet against a company with 40 million active users that just grew its revenue by 99% its latest quarter.

I'm sorry, Best Buy. You're not the best. You're not a buy. I'm tagging you as an "underperform" in Motley Fool CAPS, in a move that is long overdue.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

The Motley Fool owns shares of Best Buy, Amazon.com, Apple, Wal-Mart Stores, and RadioShack. Motley Fool newsletter services have recommended buying shares of Amazon.com, Apple, and Wal-Mart Stores. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Motley Fool newsletter services have recommended writing covered calls in Best Buy. 

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