As I write this, Best Buy (NYSE:BBY) is up 12% on the day, after having reported that sales during the holidays did better than expected in North America, ending the same store sales decline. The up move is being credited to the higher likelihood of a buyout by Richard Schulze, given that it would now be easier to put together a deal since Best Buy is showing the ability to staunch its bleeding.
However, those are not the only implications of this news. It is also deeply negative for Amazon.com (NASDAQ:AMZN) on several grounds. I will cover the reasons why.
Best Buy Is A Large Competitor
Over the first 9 months of 2012, 65.2% of Amazon.com's North American revenues came from "Electronics and other general merchandise", and although Amazon.com doesn't disclose it, most of these should be electronics. Indeed, even part of Amazon.com's "Media" revenues are electronics, because Amazon.com includes such things as gaming consoles in the Media segment. This means but one thing - Best Buy is a large direct competitor to Amazon.com.
Indeed, one of the consistent stories in the media regarding Best Buy is how it's being used for showrooming physical products. Best Buy's customers are supposedly going to the stores to check out the products, and then order them online (presumably for a lower cost). This has led Best Buy to price-match Amazon.com during the holidays. At the same price, Best Buy has the advantage of service and ease of returns over Amazon.com.
Anyway, with there being no reason to expect a large expansion in Best Buy's end market, Best Buy doing better means some of the competitors (Amazon.com included) must be doing somewhat worse (than expected).
Best Buy Going Out Of Business Is Part Of Amazon.com's Story
One of the reasons why investors accept Amazon.com's pornographic valuation and disturbing margin plunge is the widely believed story that once Amazon.com puts its competitors out of business, it will then be able to raise prices and margins. This vision is held because some competitors have already perished at Amazon.com's hands, such as Circuit City or Borders. Barnes & Noble (NYSE:BKS) lives under the same sword of Damocles for the very same reason.
The news of Best Buy being able to somehow slow or stop the bleeding, even temporarily, runs counter to Amazon.com's story. It raises the chance that Best Buy might survive - never mind even stronger competitors such as Wal-Mart (NYSE:WMT) or Costco (NASDAQ:COST). Were Best Buy to survive, and the presently depressed margins that Amazon.com is "enjoying" could be rather permanent. Under that scenario, Amazon.com's valuation would quickly turn into a huge liability for its stock price.
Best Buy Actually Indicated The Improvement Is At Least In Part Due To Amazon.com
Perhaps more importantly, Best Buy has attributed some of the improvement in sales to a better performance in the States where recently Amazon.com was forced to start collecting sales tax. This happened in Texas, Pennsylvania and California in the latest quarter. Not collecting sales taxes gave Amazon.com a huge price advantage over Best Buy even if the retail price was the same. Removing that advantage had to have an impact.
What we see now, is that indeed, Best Buy saw an improvement. The counterweight to this improvement will have been a slowdown in Amazon.com's growth. In this case, the impact would have been in Amazon.com's 1P (own) sales, because Amazon.com decided not to collect sales taxes in 3P sales where it thinks it still can avoid them. This explains why Amazon.com divulged the 3P sales growth (+40% year-on-year, also slowing down) but not the 1P sales - because 1P sales are likely to have slowed down even further. This effect also means that Amazon.com is likely to disappoint in the revenue front once it reports.
There are several reasons to believe Best Buy's better than expected reported performance is at least partially to the detriment of Amazon.com. The stabilization also runs counter to Amazon.com's story. All in all, this development is deeply negative for Amazon.com given that it trades on the assumption that margins will increase greatly and growth won't fall substantially in the next few years, yet if Best Buy manages to keep on improving both of those assumptions will be deeply challenged.