Best Buy Gives Up on Growth to Shrink Its Way to the Top

Best Buy reported fourth-quarter earnings, indicating it is focusing on cutting costs instead of growth.

Best Buy (BBY) dropped its fourth-quarter numbers this morning, indicating that the electronics-retailing giant is rapidly approaching maturity.

The company reported a profit of $2.47 per share, crushing the consensus estimate of $2.16 per share. However, same-store sales were a miserable -2.4%, and revenues came in at $16.6 billion, missing consensus by about 3%.

For fiscal 2013, Best Buy sees non-GAAP earnings of $3.50 to $3.80 per share, the midpoint of which is slightly below consensus. Likewise, revenue guidance of $50 billion to $51 billion is just below expectations. The company also expects same-store sales to drop by 2% to 4% in fiscal 2013. Best Buy plans to cut 50 US big-box stores, following the path of stumbling retailers like Sears (SHLD), Gap (GPS), and Abercrombie & Fitch (ANF), as part of a massive cost-cutting effort.

The takeaway is simple -- Best Buy has no hope of meaningfully growing the top line, so it's focusing on cutting costs to grow profits.

The fact that Best Buy is running out of gas is quite disturbing given that it has less brick-and-mortar competition than ever. It's been just a few years since Circuit City disappeared. (See The Bizarre Math Behind Best Buy's New Online Push.) And of course, we can't forget the other guys that have either closed some stores or gone out of business entirely in the past few years -- Blockbuster, Movie Gallery, Ritz Camera, F.Y.E., Office Depot (ODP), not to mention all the mom-and-pop shops that got squeezed by the recession.

At the same time, Best Buy's not exactly kicking butt online. It expects full-year domestic online revenue growth of just 15%. That's about half of the 30.5% growth analysts are expecting out of Amazon.com (AMZN), the rock-bottom pricing of which is a prime factor in Best Buy's declining fortunes.

It doubly stings that so many shoppers use Best Buy stores as showrooms before ordering online at lower-priced outlets like the aforementioned Amazon.

And from a consumer-electronics industry standpoint, think about what's hot right now -- Apple (AAPL) and Samsung (SSNLF.PK) smartphones and tablets (see Samsung and Apple Now Account for 86% of Smartphone Industry Growth), and e-book readers.

PCs, televisions, video games, digital cameras, music players, and physical media -- categories that take up an awful lot of space in the average electronics store -- all stink.

The competitive threat presented by Amazon, and the lack of a sufficient number of hot product categories, is simply lethal to investor psychology toward Best Buy stock. Let's face it -- cost cuts just aren't sexy, unless there's a case of an extremely cheap valuation. Best Buy is trading at just seven times forward earnings, but its top line isn't moving and investors know it can't cut costs forever.

So what would make me turn bullish on Best Buy?

Well, I'd like to see some hot new electronics product categories pop up, but the fact that smartphones and tablets are rapidly destroying so many other industries gives me pause.

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