In our last article, we had advised against investing in Best Buy (BBY) because of the uncertainty surrounding the buyout of the company by Richard Schulze, the founder of Best Buy. Among other reasons why BBY is not a buy is the show rooming phenomenon, bad customer service, and turnaround attempts that do not look promising in the long run. The stock is down a further 2.5% since our article. The latest news about matching prices at Amazon (AMZN) is a step in the right direction, but it remains to be seen how price cuts further reduce margins considering that bricks-and-mortar stores have higher operational expenses as well. We reiterate our recommendation of staying away from BBY.
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The shares rose sharply to about $18.5 on Oct. 3-4 on news that big private equity firms like Cerberus Capital and TPG Capital, among others, were looking into an $11 billion buyout of BBY. BBY has a market cap of $5.88 billion. Since then the price has lowered to $17.5 as investors continue to be unsure of whether the deal would eventually take place.
According to a Businessweek article earlier in October, the company under its new CEO Hubert Joly might cut its online prices to be more competitive with fellow online retailers. BBY drives 6% of its total sales from online transactions. The stock was up in the premarket today because of the news that the company has instructed its staffers at its bricks-and-mortar outlets to review pricing and bring them in line with prices offered by Amazon online. While this is a move that should have been made much earlier, this price cutting would further put pressure on the margins. Another attempt at driving profits up is expanding Geek squad (tech support service) to eBay (EBAY) and some Target (TGT) stores, in addition to shutting stores down.
Some investors might be thinking that BBY can benefit from the sales tax imposition on online retail giant, Amazon. We think that though AMZN's pricing advantage would be reduced, it would not be completely removed. AMZN also has far better customer service than that at BBY stores, and it also scores better on convenience. Also, the general trend toward e-commerce would still continue to benefit AMZN, which is pushing for same-day delivery. According to ComScore, e-commerce accounts for 37% of total computer, 28% of printer, and 23% of digital portable player sales. Show rooming increased to 43% for electronic buyers last summer.
Apart from Amazon, Best Buy has competition from other retailers who sell electronics, such as Wal-Mart (WMT), Target , Apple (AAPL), and Costco (COST). The same store sales performance of TGT and COST show that they resonate well with customers. This is a matter of concern for Best Buy as well because the customers that BBY has lost might not be willing to come back.
The short ratio has increased from 2.8 days in early September to five days as of now (13% of the float short). The 50-day moving average is $17.86, almost the same as current price.
To reiterate, we recommend not investing in BBY as the stock is quite volatile with news regarding turnaround attempts and buyout efforts coming in. Without the buyout, the company has to face a lot of challenges, the most important being competition.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.