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Is Best Buy Doing Enough With Online Sales?

By Nicholas Rossolillo - Apr 7, 2016 at 8:00AM

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With more shoppers opting to go digital, and with retailers in a battle over online traffic, how is Best Buy faring?

Image source: Best Buy.

Remember back in 2009, when Best Buy (BBY -1.31%) vanquished Circuit City? Fast-forward a few years, and Best Buy is now in its own battle for relevancy. As the way the world shops moves toward the Internet and away from physical locations, the electronics superstore has struggled to keep up with online retail king Amazon.com (AMZN 0.25%). At the same time, other traditional retailers such as Wal-Mart (WMT 0.11%) and Target (TGT 1.26%) have also been in a race to bolster their online presence, further muddying the waters for Best Buy. Is the company's online store enough to return the business to growth, or is Best Buy becoming an irrelevant player in the retail electronics world?

An overview of the online store race
Best Buy's stock has been in decline over the past year, primarily because of a slight decline in total revenue of 2%, down from $40.3 billion a year ago to $39.5 billion for the last full fiscal year, and a drop in net earnings of 27.3%, down from $1.2 billion a year ago to $897 million for the last full fiscal year. Underlying these numbers are the following key metrics:

Best Buy Results

Fiscal Year Ending Jan. 30, 2016

Fiscal Year Ending Jan. 31, 2015

Domestic comparable sales % change from previous year

0.5%

1%

International revenue % change from previous year

(26.2%)

(10.4%)

Domestic Internet sales % change from previous year

13.5%

16.7%

Source: Best Buy fourth-quarter earnings results.

It's important to note that the international sales decline, the big drag on business performance in the past year, is due to Best Buy's closing down 66 stores in Canada in the 12-month period. The leader for business growth, though, is Internet sales. The growth in this segment, however, has been unable to offset the decline in the international segment, nor has it been able to boost the business overall, as comparable sales growth overall has slowed in the past 12-month period.

It's also important to note the slowdown in Internet sales growth from a year ago. How are some of Best Buy's competitors doing? Here's a comparison against the other businesses mentioned at the outset of this article:

Company

1-Year Revenue Growth

1-Year Internet Sales Growth

Amazon.com

20.2%

17.5%*

Wal-Mart

(0.7%)

12%**

Target

1.6%

30.8%

Best Buy

(2%)

13.5%

Sources: Company earnings reports. 

*Amazon Internet sales growth excludes Amazon Web Services (AWS) from total net sales of $107 billion, but includes annual Prime Membership fees. The estimated number of U.S. Prime Members is 54 million and members pay $99 per year.
**Wal-Mart reports Internet sales growth in constant currency, excluding exchange rate gains or losses.

While Best Buy is continuing to grow its online presence, it's lagging behind the leaders in this segment. Amazon is the clear winner in online sales and the company all retailers are playing catch-up to. While Wal-Mart reported a slight drop in total sales along with Best Buy, Target was able to eke out a small gain. Target attributed the revenue growth to an increase in comparable sales, and e-commerce sales were a key contributor. It's no surprise, then, that the trailing Internet sales growth for Best Buy and Wal-Mart weren't able to offset losses in foot traffic.

Can Best Buy save itself with online sales?
I would argue that the key to growth for Best Buy is its online presence. As Amazon, Target, and other retailers have been proving, revenue growth in today's day and age is closely tied to driving traffic to the online store. Some projections have online retail sales increasing by nearly 60% by 2019.

How can Best Buy drive growth in Internet sales? The company needs to make investments into its website through advertising and online promotional deals. Target noted its success in driving interest in its website during the 2015 holiday shopping season by investing in online promotional deals. Amazon also funnels constant investment into its retail store and drives more people to its Prime program, which encourages them to buy more from Amazon as it includes free shipping. As an example, Amazon held Prime Day on July 15, 2015, a one-day sale open to the company's Prime Membership subscribers and everyone else who took advantage of a free 30-day trial to the service as part of the event. Prime Day generated record sales exceeding those of Black Friday 2014, according to the company.

Best Buy management has offered very little in the way of planning in this segment. Instead, a lot of focus has been placed on the losses seen in the international business, declining smart phone and tablet sales, and new store openings through the company's Magnolia Design Centers (which focuses on home theater design) and Pacific and Home (which sells primarily home appliances). The company also has stated a long-term growth strategy based on increasing profit margins and on educating customers about the latest technology, an ambiguous plan at best.

As shown in the chart near the top of this article, Best Buy is seeing growth from its online business, while other channels have been flat or in decline. I believe that further integrating its online presence with its physical stores can help return Best Buy to growth, but the company's lack of detail on the matter is disturbing. Rather than focusing on the segment of the business that is providing the largest return, focus continues to be funneled toward a model that has been stale for several years now. From my perspective, Best Buy appears to be heading toward irrelevance in the retail technology space.

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Stocks Mentioned

Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$72.36 (-1.31%) $0.96
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$119.20 (0.11%) $0.13
Target Corporation Stock Quote
Target Corporation
TGT
$155.36 (1.26%) $1.93
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,151.82 (0.25%) $5.44

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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