Best Buy: Problems and Potential

Loading...
Loading...

Best Buy BBY continues to confuse investors. At least once per month, an article is published arguing that Best Buy is a bargain for investors. Often, not a day later, a conflicting opinion is released. Instead of offering an opinion here, let’s take a simple and objective viewpoint based on the company’s recently released second-quarter results.
Revenue declined 4 percent to $8.89 billion year over year and missed the analyst expectation of $8.99 billion. Net income plummeted 45 percent to $146 million. These are important numbers to consider, but what many investors fail to realize is that when it comes to retail, nothing is more important than comps.
Comps, otherwise known as same-store sales, is critically important because it’s the best way to measure customer demand and loyalty for a retailer’s merchandise. Unlike revenue, comps doesn’t include sales at new stores. It only includes sales at stores that have been opened for at least one year.
Look at it this way. If a retailer really wants to show revenue improvements, it can simply open more locations. By excluding new store openings with comps, we’re able to get a true read on the strength of a retailer in the current consumer environment. With that in mind, how did Best Buy perform in the second quarter on a comps basis?
The short answer: not well. Overall comps declined 2.7 percent year over year, with U.S. comps sliding 2 percent. These aren’t terrible numbers, but they’re certainly not going to excite investors. Best Buy provided some simple reasons as to why comps sales declined.
Best Buy was quick to point out that it’s not all the company’s fault. It mentioned that, according to NPD Group’s Weekly Tracking Service, industrywide consumer electronics sales slumped 2.5 percent for the quarter. This should come as no surprise given the lack of wage growth opportunities seen in the job market. When incomes decline, electronics are seen as a luxury, not a need. But that’s not the only problem for Best Buy.
According to Internet Retailer, Best Buy generated $3 billion in ecommerce sales in 2013, which made it the 15th largest online retailer. Not bad, but not great if you dig a little deeper. Best Buy lost its 14th-place ranking to Costco COST in 2013. Costco increased its Internet sales 48% to $3.1 billion last year. Costco is well aware of shifting shopping trends and its need to attract more Millennials for the future. And then there’s Amazon AMZN, which is far and away the largest online retailer: Amazon sold $67.8 billion of merchandise last year. Amazon has also seen its revenue increase 276 percent over the past five years – a big difference from Best Buy’s 12 percent decline.
With so many consumers moving online for their shopping wants and needs, it’s going to be difficult for Best Buy to compete with the likes of Amazon, which has such an established online presence. That said, many people believe there needs to be at least one physical electronics retailer in existence. If that’s the case, then Best Buy is the most logical answer.

Loading...
Loading...
Posted In: Movers
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!

Loading...