Investors seem to love playing matchmaker these days, tapping into their inner Cupids and Emmas to pair up companies that would go well together. But let's draw the line at the silly chatter that began to percolate earlier this month about Best Buy (BBY 2.27%) gobbling up GameStop (GME 3.44%).
Now, it's true that Best Buy is desperate for growth. The meandering consumer electronics retailer was downgraded by Bank of America/Merrill Lynch on Friday morning, which slashed its rating from buy to underperform with a price target of $32. That's not every encouraging for Best Buy shareholders since the stock closed a dime below $35 a day earlier.
The downgrade is the result of analyst fears that comps will likely clock in lower during the second half of the year. Nothing inspires hooking up a pair of companies with business models teetering on obsolescence like a slowdown in sales.
GameStop is holding up considerably better, but it's still not the speed demon that it used to be. Annual sales haven't climbed by more than 5% in more than five years, and analysts see more of the same in the next couple of years. Yet that's better than Best Buy, which has seen sales creep lower in recent years.
Both companies are still in a pickle. They are primarily bricks-and-mortar chains in a world that's going digital. Best Buy used to cash in on CDs, DVDs, software, video games, and even books. All of those media forms are now easily available online, making a trip out to the strip mall less necessary.
Consumers still need the hardware to play the media -- letting Best Buy and GameStop in on the low end of the margin spectrum -- but once they've got the gear they no longer need to keep coming back beyond the occasional accessory or physical media release.
That's bad news for GameStop, which has historically scored its biggest margins on the resale of game trade-ins. There's no swapping of digital files for store credit.
However, this is actually even worse for Best Buy in terms of store traffic. Best Buy used to have a steady trickle of customers coming in for the latest CD and movie releases, allowing it to sell other items along the way. That's no longer happening, particularly for today's smartphone-tethered millennials.
GameStop is making the best of its situation. The small-box retailer has been buying back shares in a nifty move that's inflating earnings on a per-share basis. Both GameStop and Best Buy are also paying out healthy dividends, offering yields of 3.1% and 2.7%, respectively. That may be a neat way to smoke out income investors, but it doesn't change the future prospects. Both retailers are expected to see a year-over-year decline in sales for the quarter that ends later this month, and it's hard to get upbeat about the future.
This doesn't mean that Best Buy couldn't use an acquisition. However, instead of buying a fellow bricks-and-mortar retailer, any merger and acquisition activity should be focused on platforms and businesses that are growing in relevance. That's not GameStop.
