Is There A Future For Best Buy?
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by Tim Parker
On April 10, 2012, Best Buy's board of directors announced that CEO Brian Dunn would be stepping down, effective immediately. The announcement first became news in the middle of the day, with few details other than that the resignation had been a mutual decision between Dunn and the Best Buy board. This left Wall Street puzzled in light of recent announcements detailing the new direction for the ailing retail chain.
After the stock market close, The Wall Street Journal reported that Dunn's resignation had actually been in light of the board's investigation into Dunn's "personal conduct." Best Buy declined to elaborate, other than to say that his resignation was not directly related to anything that would affect the company.
This news, according to analysts, was actually better news than originally thought, because Best Buy made it clear that this had nothing to do with the business. Even if this news has little to do with the operations of the electronics retailer, it's another black cloud that will hang over a store whose days may be numbered, according to Wall Street insiders.
What's Wrong With Best Buy?
Best Buy remains the nation's largest electronics retailer with 1,100 stores in the United States, Mexico and Canada. This doesn't sound like a company in decline, but the retailer faces serious problems.
You don't have to be very old to remember that Best Buy, along with Circuit City, was the place to go if you were looking for the newest electronics. Although their prices were often the lowest of the traditional brick and mortar stores, seeing the newest electronic toy and taking it home that day was all part of the experience that made Best Buy a store that was always full of customers.
However, that was during a time when shopping online was still in its infancy. Purchasing a CD online was a relatively low risk endeavor, but buying a large television online, when TVs were heavier and shipping costs were higher, was less cost effective. When the smaller and lighter LCD TV came to the marketplace, the trend shifted more in favor for online purchasing. Add to that easily downloaded music and movies from sites like iTunes, and the lack of any new and exciting innovations in consumer electronics, it's easy to see why Best Buy has become a showroom for online retailers like Amazon in the past few years.
The numbers seem to support these claims. In 2011, Best Buy's stock lost 40% of its value, and with a forward P/E ratio of just above six compared to an industry average of 10.23, investors are not willing to pay much of a premium for Best Buy.
Even though its biggest brick and mortar competitor, Circuit City, has been out of business since January of 2009, Best Buy continues to lose revenue. According to its last earnings report, same store sales were down 2.3% from one year prior; even though the economy continues to grow stronger, total revenue has dropped three out of the past four years. None of these metrics have investors excited about Best Buy's future prospects, according to The Wall Street Journal.
Is There Hope?
The one area that continues to perform well is the mobile business. With only a 10% footprint in each store, mobile accounts for one-third of Best Buy's total revenue. The key for Best Buy may be to find products that are not easy to sell online. Mobile phone sales may do the job, because cell phone plans are complicated, and they require credit checks and contracts. Add to that the fact that customers want to take their phone home with them that day, and this may be why the mobile business continues to perform well for Best Buy.
The Bottom Line
Best Buy recently announced the closing of 50 of its largest stores, the reduction of 400 jobs and the company continues to cut the square footage of its retail stores throughout the nation. This is all part of a slow transition from a big box to small box store format. Even with these cuts and other restructuring plans, many analysts believe that the future remains grim for Best Buy.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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