Please ensure Javascript is enabled for purposes of website accessibility

Best Buy's "Strategic Investment" Failed

By Alex Dumortier, CFA - Jan 16, 2014 at 10:15AM

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

The market pans Best Buy's decision to defend its market share.

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Disappointing holiday sales results from Best Buy (BBY 2.83%) aren't helping market sentiment this morning, with the S&P 500 and the narrower Dow Jones Industrial Average (^DJI 0.00%) down 0.20% and 0.33%, respectively, at 10:15 a.m. EST.

In mid-November, I asked whether Best Buy was gearing up for a battle it can't win. Management at the electronic retailer had just declared it was willing to sacrifice profitability in order to defend the retailer's market share and "win the holiday season." The stock market didn't like the sound of the strategy then and it doesn't like it any better now that Best Buy's holiday revenue numbers are in, showing an 0.9% decline in same-store sales for the nine-week period ended Jan. 4. Shares of Best Buy were down 26% at a.m. EST.

True, Best Buy did more than defend its market share, it took share from rivals including Wal-Mart and Target. However, that doesn't translate into much of a "win." Management now admits that what it calls as a "strategic investment in price competitiveness" came with "a higher-than-expected cost" -- specifically, an estimated decline in fourth-quarter operating profit margin of 1.75-1.85 percentage points, relative to the year-ago quarter. Where is the payoff on this "strategic investment"? Not only is profitability expected to come in lower, but domestic revenue fell 1.5% during the holiday period.

In explaining the revenue decline, CEO Hubert Joly cited several factors, including the intense promotional activity in the industry and "significant store traffic declines between 'Power Week' and Christmas." But as Wedbush Securities analyst Michael Pachter told Bloomberg: "Their initiatives are not driving traffic. They are positioned as if competition will go away, and it won't. The Internet never sleeps." Ouch! Not surprisingly, Pachter has an underperform (i.e., sell) rating on the stock.

On Nov. 19, I concluded my article with the following warning:

Best Buy shares have had a fabulous run this year, as the company came back from what looked like near-death -- they're up 233% even after today's rout. However, that recovery rally may have ended today; Best Buy has survived, all right, but thriving in this environment -- and achieving further stock gains -- is a different matter altogether.

Along with Netflix, Best Buy was one of the best-performing stocks in the S&P 500 last year. However, while Netflix remains a secular growth story, the same cannot be said of Best Buy -- the skepticism I expressed last year is still warranted.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool has no position in any of the stocks mentioned. 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.

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

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$32,803.47 (0.00%) $0.00
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$78.54 (2.83%) $2.16

*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
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

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.