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Best Buy Isn't Dead, but It Is Dying

By Rick Munarriz - May 25, 2016 at 1:22PM

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The consumer electronics superstore chain's shares slumped after it reported a mixed quarter, and its long-term outlook isn't very encouraging.

Things aren't going so well in Circuit City's waiting room. Shares of Best Buy ( BBY 2.48% ) fell 7% Tuesday after the consumer electronics retailer followed up mixed financials with an uninspiring near-term outlook.

The first quarter of Best Buy's fiscal 2017 wasn't horrible. Revenue slid 1.4% to $8.4 billion, but that was the handiwork of an 8% decline internationally and the closing of several namesake superstores and Best Buy Mobile locations.

Store-level comps dipped just 0.1% -- but that's a metric worth digging into deeper. Best Buy divides its online sales -- up 24% and now accounting for 10.6% of its domestic revenue versus 8.5% a year ago -- into its existing store sales to pad comps. That's not cheating. A growing number of retailers do this, and many online sales at Best Buy originate at its stores or consist of online orders that are picked up a physical storefront. However, we still can't assume that store-level activity is merely flat. 

The news gets better on the way down to the bottom line, with adjusted earnings up 10% to $144 million. Aggressive share buybacks over the past year are pumping up its profitability on a per-share basis; EPS is up 19% to $0.44 a share. 

Best Buy exceeded analysts' expectations for the quarter, and expanding margins on flat sales are certainly the type of numbers that confetti shooters were made for. However, then we get to Best Buy's take on the current quarter. It sees another period of flat comps with international sales dragging down overall performance. It sees $8.35 billion to $8.45 billion in revenue for the fiscal quarter that closes at the end of July, 1% to 2% below the prior fiscal second quarter's tally. The real dagger is its profit outlook. It expects to clock in with adjusted earnings of between $0.38 a share and $0.42 a share, well short of both the $0.49 a share it served up a year earlier and the $0.50 a share that Wall Street pros were targeting. Margins will shrink (which is why it's a good thing you didn't pull the trigger on those confetti shooters). 

Big box, big problems

It isn't easy running a consumer electronics superstore these days. Best Buy's stock is now near the $30.45 mark where it began the year, and in its niche, it's the lucky one. Smaller rivals Conn's ( CONN -5.00% ) and hhgregg ( HGGGQ ) have sorely vexed their shareholders. They have both surrendered 54% of their value so far in 2016, making Best Buy's flat showing miraculous in relative terms. 

Conn's is struggling with stubborn delinquency rates, an unwelcome byproduct of letting  customers with poor credit finance big-ticket purchases. Red ink is the problem at hhgregg. It has rattled off nine consecutive quarters of losses, according to S&P Global Market Intelligence data. 

The three company's business models have big differences. Appliances account for just over half of the sales at hhgregg; at Best Buy they're less than 10% of its sales. Conn's, in contrast to both, sells more furniture and mattresses than consumer electronics. However, all are struggling in a period when e-commerce is finally mastering the art of selling larger electronics. 

Best Buy has been feeling the pinch for years on its small-ticket items. The mobile and digital revolutions ate into its once-buoyant CD, DVD, and video game sales. Best Buy is holding up well, considering the hand that it's been dealt, but it can't rely on gobbling up market share forever. It may wind up being the last consumer electronics store left standing in a few years, but it's hard to fathom that being the case a decade from now. As good a job as CEO Hubert Joly has done in keeping the blood loss to a minimum, it's hard to deny that Best Buy's best days are in the past. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$107.26 (2.48%) $2.60
hhgregg, Inc. Stock Quote
hhgregg, Inc.
HGGGQ
Conn's, Inc. Stock Quote
Conn's, Inc.
CONN
$21.07 (-5.00%) $-1.11

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