Why Shoppers Are Saying 'Bye-Bye' To Best Buy

by: Chris Lau

Prior to announcing earnings, Best Buy (NYSE:BBY) traded in the range of $27 to $33. During the sell-off in August, the stock managed to hold on to $25. In its most recent results, Best Buy blamed a change in consumer trends as a reason for a 30% drop in profits for the quarter. Weak television sales and computers offset strength in smartphone and tablet sales. Some analysts think that competition from Amazon (NASDAQ:AMZN) and Ebay (NASDAQ:EBAY) are undermining Best Buy’s business model reliant on the physical retail stores.

Best Buy now trades at a P/E of just 7.53, and sports a 2.74% dividend.

Best Buy’s misfortune is not due to the shift of retailing to online. If that were so, retailers with storefronts would not still be in business after the dotcom boom.

Best Buy cannot blame Amazon or Ebay either. Amazon, Ebay, and even Newegg.com have always sold products at lower prices, especially desktops, laptops, and components.

Why is Best Buy is failing, and should investors think of the shares as a good buy? As the title suggests, the answer is no. Consumers are saying “Good Bye” to the retailer, and here’s why:

Customer service quality is on the decline. Sales people are not adequately informed with the products offered by the retailer. Still, the company hires knowledgeable staff at the mobile centre, but earnings results showed that this was not enough to stem declines.

Consumers are tapped out of buying electronics: fewer consumers require another new computer, big television, Apple (NASDAQ:AAPL) iPhone/iPod/iPad, DVD player, and Blu-ray player. The consumer electronics refresh cycle is over.

Best Buy is supposed to be a specialty electronics store with cheap DVD movies. Why, then, are prices higher than Walmart (NYSE:WMT) and Costco (NASDAQ:COST)? Extend warranty prices increased, but the coverage decreased. Costco rewards its customers for buying margin-rich extended warranties.

Product-placements for stores need to be re-designed to make it easier for consumers to find what they are looking for. To cater to web-savvy consumers, the website should as user-friendly as EBay’s and Amazon’s store front. The product reviews provided by consumers should play a more prominent role for website visitors.

Best Buy needs more enticing, fresh deals to increase traffic to the online site and the store.

Back to the DVD movie idea, why are DVD prices higher than those found at online retailers? EBay’s DVD prices are cheaper, maybe because they are used. Best Buy needs to find a compelling reason to entice consumers to buy new, not used DVDs.

Best Buy shares have the same allure as Hewlett-Packard (NYSE:HPQ): it is now a company in transition. Bullish investors may reduce the average purchase price of shares by writing call options against a long position, or by buying more shares as prices drop. This assumes an investor believes shares do not have further to fall.

With the looming global banking crisis in Europe, and slower growth worldwide, it does not look like Best Buy shares have bottomed yet. Investors who wish to have a retail exposure in their portfolio are better off with EBay. EBay ($29.40, P/E =22.09) will likely outperform Best Buy due to successful strategies that include “bill me later,” Paypal transactions processing, and a lack of physical retailing costs. Amazon.com not only has a successful online store front, but has a successful ebook franchise. Amazon.com has a P/E of nearly 100, and is also rumored to be launching a tablet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.