When a stock like Best Buy (NYSE:BBY) drops 25% or more in one day, investors are right to question the viability of the business. However, the stock market often overreacts on a regular basis to news, and the stock had roughly tripled in the previous 12 months. What has changed is the stock's price, but what hasn't changed is the uncomfortable fact that Best Buy has some tough choices to make.
The real report
Let's get one thing straight: Best Buy didn't do well during the holiday season, but things aren't quite as bleak as some are painting them to be. It's true that Best Buy's same-store sales were down 0.8%, but compared to last year's 1.4% decline this was actually an improvement.
Second, Best Buy gets roughly 30% of its domestic revenue from the sale of consumer electronics. According to NPD, this type of sale declined by 2.4% during the nine-week holiday sales period. With almost 30% of Best Buy's business facing significant headwinds, it would have been tough for the company to report significant growth.
While it makes sense that Best Buy probably lost some sales to competitors like Amazon.com (NASDAQ:AMZN) and some gaming sales to companies like GameStop (NYSE:GME), retailers across the board were very price competitive in the last couple of months.
"Not available" doesn't cut it in today's environment
If Best Buy is looking for a way to turn the ship, there are a few choices the company needs to make right now. The first is...Best Buy needs to understand that it can't limit how customers make purchases.
One of the biggest benefits that Amazon offers customers is fast shipping on their purchases. Can you imagine if Amazon had a product on its site, showed a price, and said "not available for shipping?" This would never fly, and customers would not stand for it.
For example, if you go to Best Buy's website and search for PC laptops, the top-five most popular are available both to ship and to pick up at a local store. What is unbelievable is the sixth and seventh most popular laptops are "not available for shipping." If the company has the item in stock at a store, it must find a way to offer to ship these items to customers.
Compared to Best Buy, GameStop is at least realistic with its selection. Most games are available for shipping in 24 hours, and the company also offers digital downloads of many items. With around 6,000 stores, GameStop offers thousands more locations than Best Buy.
Stop helping competitors
The second issue Best Buy must fix is...you don't sell the device (the Kindle Fire lineup) that threatens to undermine a large part of your business. With a Kindle Fire device, the customer holds in their hand a gateway to everything that Amazon sells. Whether it's Amazon Instant Video, which threatens to undermine Best Buy's physical DVD and Blu-ray business, or Amazon Cloud Player which threatens Best Buy's music sales, the Kindle is dangerous to Best Buy. This doesn't even count the thousands of electronics and general merchandise items that Amazon sells that threaten Best Buy's sales in the area of computers, mobile phones, appliances, and many other areas. The fact that both Best Buy and GameStop continue to sell this lineup is a questionable decision to say the least.
The Kindle lineup was mentioned eight times in the top highlights in Amazon's most recent earnings report. Amazon designs and sells this device to drive sales for the Amazon ecosystem. Whether it's the advantage of signing up for Amazon Prime to have thousands of streaming movies or faster shipping on orders, the Kindle Fire is a weapon of mass destruction to every traditional retailer.
The big difference between Best Buy and GameStop's business models is the fact that Best Buy sells the Kindle lineup with a prominent placement in its stores and online. GameStop sells primarily pre-owned Kindles to drive higher margins. In addition, used electronics is one of the fastest growing segments of GameStop's business.
You can't win, it's time to run away
The third issue Best Buy must fix is...the physical music and video business is dying, and the company is wasting time and money on this business. In nearly every large Best Buy store there is a large amount of square footage devoted to physical music and DVD sales.
There are two big problems with this strategy. First, the increase in streaming music and video services threatens the viability of physical sales. Second, Best Buy has no competitive advantage in this business, and other retailers can undercut the company at every turn. If you look at Best Buy's Entertainment division sales over the last few years, there is a clear pattern of negative same-store sales and the problem is only getting worse. In the quarter ended November 2011, Best Buy's Entertainment business witnessed a domestic same-store sales decline of 12%. By the same quarter of 2012, the Entertainment business saw same-store sales decline by 18.5%, and by November 2013, same-store sales in the domestic market dropped by 26.8%.
There is a reason GameStop sticks to gaming; it's what the company knows and is good at. Amazon offers digital and physical sales of music and videos that Best Buy just can't match. Traditional retailers like Wal-Mart and Target can offer physical music and video sales, and both companies have better margins than Best Buy because of their more diverse revenue streams.
The bottom line
In the end, Best Buy needs to make the ability to purchase items easier. No item available in stores can be unavailable to ship. The Kindle might be popular, but its popularity threatens several of Best Buy's most important businesses. The company is wasting time and resources on music and video sales, as that battle is already over. Best Buy isn't in as much trouble as today's headlines suggest but if the company doesn't start to make some hard choices, this will be just the beginning of trouble for the retailer.
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.