Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Best Buy in Wrong Business at Wrong Time


The retailer is getting creamed.

Conventional wisdom would indicate that deceased competitors means higher profit margins for survivors. But in consumer electronics, nothing could be further from the truth.

Leading retailer Best Buy (BBY) is getting creamed today on a weak fourth-quarter margin outlook which drew investors' attention away from the actual earnings guidance, which was much better than expected.

Bulls may argue that the $3-plus decline in Best Buy is a buying opportunity, but I say you'd better think twice before jumping headfirst into this troubled industry.

Let me give you some context.

Circuit City, KB Toys, Blockbuster (BBI), Movie Gallery, Ritz Camera, F.Y.E., and Office Depot (ODP) together have closed thousands of retail locations in 2009. All compete, or competed, with Best Buy in one or more consumer-electronics categories. Of course, you can't forget about all the Mom-and-Pop outfits that were clobbered into bankruptcy during the credit crunch.

And from a narrower industry perspective, where are all the hot products? Because I can't find any!

Macs? Yes, Apple (AAPL) products like those 27" iMacs are in high demand -- but why play with Best Buy when you can go with Apple itself? Apple is the best electronics retailer on the planet, and the Mac revenue contribution to Best Buy isn't large enough to move the needle.

Smartphones? They're doing well now, but are quickly becoming as commoditized as eggs and milk.

The only things people are buying in large numbers these days are cheap laptops and TVs, which are unlikely to drive the real profit engine of retailers like Best Buy -- the extended warranty. It's hard to sell high-margin warranties on lower-priced products because there's not much financial risk to the consumer if an item fails.

So even with seriously reduced competition, there's just no pricing power -- it really is a buyer's market out there and that's bad for Best Buy.

I do give Best Buy credit for a lot of things. Compared to other mass-market retailers, it provides a pretty decent shopping experience -- the stores tend to be clean and well-organized, and customer service tends to be pretty good.

It's just too bad that it's in the wrong business at the wrong time.

Minyanville's FlexFolio is beating S&P 500 by 25% since inception. Access today and get trade alerts with your FREE 14 day trial.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos