Best Buy Co., Inc. (BBY) Is Just a Bad Idea Right Now

Page 1 of 2

Best Buy Co., Inc. (NYSE:BBY) shares have been on a steep upward trajectory this year, but much of the price appreciation has seemed predicated on hope. Now, the electronics retailer’s latest quarterly results have tempted loyalists into thinking the turnaround is under way. There are a few major cases against the bull case, and “sales” are just the tip of the iceberg.

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

There’s no doubt that Best Buy Co., Inc. (NYSE:BBY)’s return to quarterly profitability is a welcome change from its previous losses. The retailer cut $65 million in annual spending during the quarter. Of course, companies must keep costs down, or even cut them when times are tough. However, the trick is cutting them in the right ways. Otherwise, these decisions may come back to haunt the company. Such cost-cutting might look good now, but if it isn’t implemented in a smart way over the long term, it could drag down true innovation, and possibly hurt the workforce or cause a drop in overall business quality.

More immediately, for all that the profitable quarter further jazzed bullish investors, Best Buy Co., Inc. (NYSE:BBY)’s sales are still a long way from healthy growth. Best Buy Co., Inc. (NYSE:BBY)’s same-store sales fell 0.6%, and net sales fell by 0.4% to $9.3 billion. The company’s sales haven’t risen for more than a year.

Many investors are also excited about some freshening changes coming to Best Buy Co., Inc. (NYSE:BBY)’s sales floors, such as its “stores-within-stores” plan with Microsoft. However, management admitted in the conference call that such plans will be big undertakings, and these Windows hubs will be disruptive to the stores as they stand. These hubs will switch around the stores’ computer departments, and it’s not difficult to see why that might not be a seamless transformation easily conducted overnight.

Meanwhile, given the fact that the Microsoft brand wasn’t exactly missing from Best Buy Co., Inc. (NYSE:BBY) before — and Microsoft just doesn’t have the exciting appeal of other tech names — it’s difficult to figure out why investors are incredibly bullish on that particular strategy to begin with.

It’s the consumer, stupid
Even beyond Best Buy’s strategies, there’s another big reason investors’ current euphoria about Best Buy is misplaced. Many American consumers are struggling, and the competitive climate is an extremely important part of the current equation.

Last week’s results from Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) should sober people up; the retail sector’s facing major challenges right now. Both major discounters pointed to sobering signs of consumer weakness, giving lackluster views for the rest of 2013.

Page 1 of 2