Sometimes the idea that a company is in trouble becomes so prevalent that investors forget to check the facts. Best Buy (NYSE:BBY) has been the target of many articles in the last few years suggesting that the company was on its way to becoming the next Circuit City.
This sounds so logical...
Amazon.com (NASDAQ:AMZN) has been named as the most likely destroyer of Best Buy. Ironically GameStop (NYSE:GME) could be one of Best Buy's biggest problems that no one sees coming.
In theory, Amazon is a more efficient operation and can offer better pricing than Best Buy...and far more choices. With more than 65% of Amazon's sales from electronics and merchandise, the company's business is still more about goods than services. With domestic sales increasing by more than 30% over the last several quarters, there is little doubt that Amazon is growing faster than its competition.
One of the bigger stories in retail in 2014 could be the new game consoles and new game releases. With billions of sales for both new consoles, and hit games reaching more than $1 billion in sales in just their first few days, Best Buy needs to capitalize on this positive development. However, the retailer that seems to be the de facto beneficiary from this new console cycle is GameStop.
GameStop saw same-store sales increase by more than 20%, and the release of Grand Theft Auto V was a big factor behind this significant increase. In theory, GameStop offers something that Best Buy has a hard time matching. The company offers knowledgeable employees who know the ins and outs of gaming better than traditional retailers.
It's the people in blue that matter most
The first reason Best Buy is stronger than some think is the company has an army of men and women in blue that argue well for Best Buy's future.
For those who believe that Amazon will kill Best Buy, just visit a local Best Buy and listen to some of the conversations between customers and employees. Best Buy employees are sought out for advice and knowledge about computers, mobile phones, games, and electronics of all types.
Amazon can't hope to match this experience, as customers are on their own to discover the best options to meet their needs. While GameStop employees may have more game-specific advice, the company's lack of floor space makes matching Best Buy's selection near impossible.
It's a showroom and that's a good thing
The second reason Best Buy is stronger than some think is the company has accepted its showroom status and is making the most of it. The company is fighting the pricing battle by matching prices with Amazon, Target, and Wal-Mart.
Best Buy's price matching is putting pressure on the company's domestic gross margin, which stands at less than 24% in the current quarter. While Amazon and GameStop carry higher gross margins at 27% and 28%, respectively, Best Buy's price match is beginning to turn sales around. For example, the company's domestic same-store sales increased by nearly 2% compared to a 4% decline last year.
In addition, Microsoft, Samsung, and Apple are all vying for prime placement in Best Buy stores, putting some of the biggest guns in the business in league with Best Buy. More importantly, Microsoft and Samsung are training and staffing Experience Stores in Best Buy. This crew of experts should also improve the quality of service provided by the men and women in blue as well.
Many ways to connect
The third reason Best Buy is stronger than many might expect is the company can connect in more ways and more effectively than its competition. With around 900 big-box stores and hundreds of Best Buy Mobile locations, the company has plenty of physical locations to engage customers.
Best Buy has consistently reported at least 10% annualized increases in online sales, and there is something Best Buy can offer that Amazon and GameStop can't match. The company offers online orders delivered to a local store, which Amazon can't do. The company can also ship from its stores to customers, which is a challenge for GameStop.
Many physical retailers are beginning to experiment with this store-as-a-warehouse concept. Though GameStop has more than 6,000 locations, each location is significantly smaller than the average Best Buy. This smaller presence makes using these locations as shipping points impractical.
With improving sales, better service due to the showroom representatives, and more ways to connect with customers who need advice, Best Buy is stronger than many think.
Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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