Electronics retailer Best Buy Co Inc (BBY) said in a news release today that it’s selling off Five Star, its line of Chinese retail stores, to Jiayuan Group, “a prominent China-based real estate firm.” Best Buy will maintain minimal exposure to the world’s second-biggest economy through its private label business in China.
Terms of the sale were not disclosed.
The divestiture is part of an effort by BBY to focus more intently on its North American operations at a pivotal time in the company’s history. Best Buy’s sales growth flatlined in the 2011 fiscal year and in FY 2012; in FY 2013 sales fell by 3%; in FY 2014 sales were down nearly 14%.
A Wise Move, But Can it Help Best Buy Stock?
Something about Best Buy’s strategy needs to change for BBY stock to be a legitimate long-term buy, and BBY’s international divisions haven’t exactly been the stars of its portfolio. Best Buy acquired a 50% stake in the U.K.’s Carphone Warehouse Group PLC in 2008, dishing out $2.15 billion to increase its stake from the mere 3% of the mobile-phone company it held before.
Five years later, Best Buy sold the business, which it had named “Best Buy Europe,” back to Carphone Warehouse for $775 million.
With just more than 4% of BBY revenue in fiscal 2014 coming from China and more than 95% of sales coming from the United States and Canada, the decision to focus on North America isn’t all that shocking. Consider the fact that China’s economy is beginning to show some uncharacteristic weakness, and the Five Star divestiture makes even more sense.
But what now? Best Buy’s biggest nemesis, Amazon.com, Inc. (AMZN) continues its quest to be the king of all commerce as it ignores profits to gain market share and boost sales. AMZN CEO Jeff Bezos and his cutthroat pricing strategies and penchant for disruptive technologies essentially drove Borders out of business and RadioShack Corporation (RSH) is teed up to be the next victim.
While it’s certainly not a reason to buy BBY stock, Best Buy should count the lucky stars its survived this long in the age of Amazon. Circuit City, after all, couldn’t handle the heat and went down in flames as the Great Recession tested the endurance of American businesses.
Rather than using self-defeating promotional firesales as a gimmicky defensive strategy, BBY is managing to fend off the vulture-like AMZN by embracing its own “flaws.” Critics of big-box stores like Best Buy love to talk about how brick-and-mortar retailers are just showrooms where customers go to interact with products physically before turning around and buying them elsewhere online.
Best Buy’s response has been to partner with the companies behind some of today’s most popular consumer tech products. In fiscal 2014, Best Buy opened 1,400 Samsung Elect Ltd(F) (SSNLF) stores-within-a-store. The same year it also teamed with Microsoft Corporation (MSFT) to open 600 Windows stores within Best Buy locations.
Bottom Line
BBY stock is down more than 9% this year and trails the S&P 500 by more than 20 percentage points in 2014. The sale of Five Star won’t change the game for Best Buy, but it’s a move in the right direction, and we should expect Best Buy to be around for a long time.
The only question is, can it ever thrive? It needs to put up a fight in e-commerce to do so. With Best Buy’s website crashing on Black Friday, BBY has a long way to go before it’s in Amazon’s league.
John Divine is assistant editor of InvestorPlace.com. As of this writing, he held no positions in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid.
