How Is Best Buy Still Hanging Around?

by Adam Benjamin | July 11, 2013 6:15 am

How Is Best Buy Still Hanging Around?

People have been saying it for years: Showrooming will be the death of big-box retailers.

So how are companies like Best Buy (BBY[1]) and even smaller H.H. Gregg (HHG[2]) still around? Surely the ease, availability and better prices of companies like Amazon (AMZN[3]) are well-known by now, and should have put those brick-and-mortar retailers out of business.

But they haven’t. Not by a long shot. In fact, 2013 has been a renaissance year for Best Buy. After starting 2013 at a 10-year low has rebounded 155% so far, and was the second-best-performing S&P 500 stock[4] for the first half of 2013. (And to its credit, HHG has ripped off an impressive 110% so far this year.)

Sure, some of BBY’s growth has come from investors hoping for a buyout, but that doesn’t explain how the much-maligned electronics retailer has managed to fend off the showrooming curse enough to stay alive, let alone thrive.

So how is Best Buy keeping the lights on?

  1. Best Buy Mobile: The company recently shifted its strategy to move away from large, open stores to smaller, more ubiquitous shops focusing on mobile. Since the start of Q1 2012, the company has closed 50 big-box stores but opened 136 Best Buy Mobile locations. Exact sales numbers for the smaller stores are elusive, but the move to mobile is a smart one, as digital downloads will eat away at its entertainment division, and HDTV saturation will probably continue to hurt consumer electronics.
  2. Computers and Devices: This is closely related to reason No. 1. New iterations of technology are coming out faster and faster, and not everyone has the time to keep up with the changes. Especially as the line between mobile phones and computers continues to blur, people will have questions, and Best Buy offers answers. This segment accounted for 47% of revenues in Q1, up from 45% the previous quarter.
  3. Online Sales: Knowing that it’s losing business to the ease of online shopping, Best Buy is making efforts at improving its own online sales. Earlier this year, the company’s CEO was quoted as saying that BBY had “underinvested in the online channel”[5] and was dedicated to improving them. So far, the results look promising: Online sales increased 16% in Q1.
  4. Promotions and Sales: Amazon isn’t just less of a hassle thanks to ease of online use — it’s also usually cheaper than Best Buy’s full prices. But that wind is changing. The big-box retailer has been aggressively pushing promotions and discounts[6], giving people more incentive to come into the stores.

Investors beware: These reasons might explain why Best Buy is still around, but they don’t explain the company’s outsized performance in 2013, and they certainly don’t paint a picture of long-term growth.

Consider this: Best Buy has put out two earnings reports during its incredible 2013 run. For Q4 2012, it reported earnings of $1.55 that were down from $2.50 in the year-ago period, and in Q1 2013, earnings plunged from 76 cents to 32 cents. The company’s stock and its fundamentals are wildly out of whack — you have to wonder whether BBY isn’t a bubble waiting to pop.

And while more Best Buy Mobile sites is encouraging, those 50 regular-store closures give you an idea what’s happening to its core business.

Investors might be thrilled with Best Buy’s performance so far this year, but most of what it’s doing seems to point toward merely survival going forward — not real growth.

Adam Benjamin is an Assistant Editor of InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  2. HHG: http://studio-5.financialcontent.com/investplace/quote?Symbol=HHG
  3. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  4. second-best-performing S&P 500 stock: http://investorplace.com/2013/07/the-sp-500s-10-best-stocks-so-far-in-2013/
  5. “underinvested in the online channel”: http://news.yahoo.com/best-buy-profit-tops-estimates-sales-miss-113309914.html
  6. promotions and discounts: http://news.cnet.com/8301-1035_3-57590360-94/best-buy-offering-free-iphone-5-in-its-trade-in-promotion/

Source URL: http://investorplace.com/2013/07/how-is-best-buy-still-hanging-around/
Short URL: http://invstplc.com/1bDtffh