, Inc. (AMZN), Wal-Mart Stores, Inc. (WMT): Best Buy Co., Inc. (BBY) Is Facing Too Many Headwinds

Page 1 of 2

Best Buy Co., Inc. (NYSE:BBY)’s stock has appreciated 188% year-to-date. You might be upset you missed it, but this meteoric ascent likely had a lot more to do with the broader stock market’s rise than Best Buy’s real-world performance. Now we must look at what the future holds for this once-dominant consumer electronics retailer.

External factors

By selling products and services primarily related to electronics, Best Buy Co., Inc. (NYSE:BBY) relies heavily on consumers’ discretionary spending. Therefore, many external factors play an important role. For instance, if unemployment is low, the stock market is in bull-mode, and if real estate is improving, then Best Buy is more likely to see growth.

Best Buy Co., Inc. (NYSE:BBY)

While unemployment isn’t low at the moment, it has been improving. And stocks and the real estate market have been hot. On the other hand, one must look towards the future in order to make money in stocks. And based on historical trends, interest rates can’t remain low forever. When interest rates eventually increase, it will negatively impact stocks and real estate. This, in turn, will affect consumer spending, as well as Best Buy Co., Inc. (NYSE:BBY)’s potential. Furthermore, while unemployment is lower than before, it’s a deceptive reading. More people are employed, but lower wages are a big issue.

All of the above factors are concerning, and they’re on top of a 2% payroll tax increase, as well as rising gas prices.

Company goals and cost-cutting measures

Best Buy Co., Inc. (NYSE:BBY)’s ultimate goals are revenue growth and disciplined capital allocation. To get there, it aims to offer all of the latest and most popular devices in one place (as well as online) at competitive prices, and it wants to offer knowledgeable advice via its Geek Squad service.

Best Buy Co., Inc. (NYSE:BBY) is also cutting back on its large-format stores and opening more Best Buy Mobile stand-alone stores. For instance, the total store count in Q1 FY 2013 was 1,103, and that dropped to 1,056 in Q1 FY 2014. However, the Best Buy Mobile stand-alone store count totaled 326 in Q1 FY 2013, versus 409 in Q1 FY 2014. This trend should help cut costs and potentially improve the bottom line; but due to smaller square footage and a limited category focus, it won’t help the top line.

Best Buy has made several other moves to reduce costs, such as negotiating reduced rent for some stores, eliminating $175 million in selling, general and administrative (SG&A) and supply-chain costs, and entering an agreement to sell a 50% interest in Best Buy Europe to Carphone Warehouse for $500 million.

Fierce competition, Inc. (NASDAQ:AMZN), a market-share stealing machine, victimized Best Buy with ease. is the largest online retailer in the world, and with more people looking for convenience, the company’s growth has been phenomenal. It’s a low-margin operation, but CEO Jeff Bezos isn’t focused on that. Instead, he wants to roll over as many competitors as possible while increasing Amazon’s brand recognition.

Best Buy is attempting to fight back in a technological sense. Best Buy will never have as large of an online presence as, Inc. (NASDAQ:AMZN), but domestic online comps did jump 10.5% in the second quarter, which is a good sign.

It should be noted that both Best Buy and, Inc. (NASDAQ:AMZN) have trouble delivering profits. Best Buy and Amazon were in the red in three of the last four quarters and two of the last four quarters, respectively. However, Amazon is a sensational top-line performer, whereas Best Buy is downsizing. That said, it should be noted that Amazon is trading at 102 forward earnings, and while it’s likely to be a quality long-term play, expectations are too high for a recommendation here — especially with the absence of consistent profits.

Page 1 of 2