I have never been so eager to short a stock as I am to short Best Buy (BBY) stock. As I’ve written before, Best Buy stock is a horse and buggy in the age of the automobile — which, in this case, is Amazon (AMZN). BBY stock cannot ultimately survive with a brick-and-mortar business model when Amazon and dozens of other online companies have efficient operations that lack storefronts.
And after reading the latest earnings report, I’m more convinced of that than ever. It isn’t just that the numbers were crappy, although I will discuss that part in a moment. The bigger issue is that there’s nothing happening at Best Buy that gives me any confidence that change is happening. The company has had a new CEO for two years and I don’t see anything resembling a big, huge makeover that turns Best Buy stock into something that resembles a value.
Let’s go back to the numbers that, again, are just horrible.
Best Buy stock reported earnings of 42 cents per share, down from 69 cents per share last year. Revenue fell 4%. Comps fell 2.7%. Gross profit fell 16.4%. Gross margin fell 340 basis points. Here in the U.S., revenues fell 2.4% on a 2% decrease in comps. Gross profit fell 4.5%, margins fell 50 basis points. On the international side, revenues dropped 12.1% on a 6.7% in comps. Gross profit declined 16.8% resulting in a 120 basis point drop in margins.
There is no spin to be made here. These numbers stink. Everything is falling … hard.
Best Buy touted that its turnaround campaign, called “Renew Blue” managed another $40 million in cost savings, bringing total cost cuts to almost a billion dollars.
So what? Saving money doesn’t build a business or create some kind of exciting new direction. It’s just trying to keep the stores standing.
BBY touted that it has installed 800 Samsung and Sony home theater “stores-within-a-store”, along with 25 design centers.
So what? These are cosmetic improvements. It’s like a new coat of paint. Nobody cares about stores-within-stores. Would-be customers will come, check out the products, and buy them online from another vendor.
Yeah, online comps rose 22%. But what is that doing to margins? See above for the answer.
So is it time to short? I keep pointing to Circuit City as a vision of Best Buy’s future. How is BBY any different? I don’t think it is, and I don’t see any great vision or future here. Unfortunately, the truth is that Best Buy can ride things out for quite some time. It is making a profit, has $2.1 billion sitting around and has manageable debt service.
Worst of all, the market sent Best Buy stock soaring last year for no good reason. That could happen again.
So, no, it’s not time to short Best Buy stock … but you’d be crazy to buy and crazy not to sell if you hold it.
As of this writing, Lawrence Meyers was long AMZN. He is president of Asymmetrical Media Strategies, a crisis PR firm, and PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets at @ichabodscranium.