The retail game has changed, and a number of famous names will struggle to survive the transition.
Online retailers, led by Amazon.com (NASDAQ:AMZN), have been part of the problem. The Internet forced prices down and made it easier for customers to comparison shop. It also put the onus on stores to treat people well and actually have what they want in stock. This new landscape gives consumers much more power than they ever had.
Shoppers can get exactly what they want delivered in 48 hours or less from Amazon by pushing a couple of buttons. That has in different ways affected two venerable retail brands: Best Buy (NYSE:BBY) and Barnes & Noble (NYSE:BKS). The two retailers are reacting in different ways to the changing climate. Each has a stock worth watching, but one seems to have turned the corner while the other appears to be on a slow march to oblivion.
A turnaround in progress
Not that long ago, Best Buy looked like it would follow former rival Circuit City to the great retail center in the sky. The company had leadership problems and, perhaps more than any other brand, was falling victim to showrooming -- the practice of customers using the store for research and then buying online.
But the company's fortunes began to change when Hubert Joly was named CEO in August 2012. Thought by many as an odd pick given his background in restaurants and hospitality, Joly has proven to be an able leader. He brought immediate fiscal responsibility to the company, embarking upon a plan to sensibly trim expenses to hedge against declining sales.
The new CEO also worked to diversify the company's offerings by increasing the Geek Squad service side of the business. In addition, he brought in more store-within-store concepts by partnering the chain with Microsoft and Samsung, along with various wireless phone providers. Joly has made measured progress to the point that it might be safe to take Best Buy off the endangered retailer list.
The company posted essentially flat year-over-year revenue for the first quarter of its fiscal 2016, and Joly is optimistic about the future. In a press release, he stated:
While merchandising, marketing and operational execution were the tactical drivers of our better-than-expected first quarter financial results, strategically, we believe the cumulative impact of the progress we have made to improve our multi-channel customer experience is what has allowed us to consistently outperform the market. We have made real progress and it is showing up in our results. I therefore want to thank our teams across all functions for delivering this progress and these results. Let me be clear though, all of us know that we have significant opportunities and work ahead of us.
What exactly does it sell?
While Best Buy has smartly changed its business to reflect the new retail reality, Barnes & Noble has struggled to do the same. The company, which has seen revenue gradually fall in recent years, still makes money. EBITDA totaled $295 million through the first three quarters of FY15: up from $240 million a year earlier. Nevertheless, the company's core business might just evaporate.
Barnes & Noble, above all else, sells books. But many consumers no longer need or want to buy a book in a physical bookstore. The company bumps up against Amazon, in that the online retailer sells books at lower prices and also dominates the digital book sales market. Barnes & Noble's Nook digital reader has lost almost all of its market share, which the company detailed in its fiscal second-quarter earnings release.
The NOOK segment (including digital content, devices and accessories) had revenues of $64 million for the quarter, decreasing 41.3% from a year ago. Device and accessories sales were $18.7 million for the quarter, a decrease of 63.7% from a year ago, due to lower unit selling volume. Digital content sales were $45.2 million for the quarter, a decline of 21.2% compared to a year ago, due primarily to lower device unit sales.
Essentially, when it comes to digital book sales -- arguably the inevitable future of the reading business -- for Barnes & Noble it's all over but the shouting. Things don't look much better on the retail side, where sales have stagnated.
The chain has large stores filled with products that can be bought for less online (where copies will also always be available). It has made some effort to diversify into specialty toys, but -- speaking as a person who ran a very large specialty toy store for two years -- it's not doing that very well.
Toys are not stationery or bookmarks that can simply be add-ons to an existing sale. Because almost every toy and game stocked by Barnes & Noble can be purchased for less on Amazon, selling those items requires a passionate, well-trained staff. The company has that when it comes to books, but not with its toy lines.
That leaves the chain as a giant coffee shop where people come to read for free while making notes about what they should buy online. It's more museum than store in some ways, and it's hard to see how the company will turn that around in a world where physical books are not likely to win out over the convenience of digital ones.
Daniel Kline owns shares of Apple and Microsoft. He will be very sad but partially to blame if bookstores go away. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com, Apple, and Barnes & Noble. 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.