Best Buy Might Survive After All

| About: Best Buy (BBY)

I hadn't been to a Best Buy (NYSE:BBY) store for a long time until last week. I remember going to a Best Buy store back in 2007 and my experience was really disappointing. The store was disorganized, the employees were hard to find, and once you located one, he or she was very likely to be clueless about what you were looking for. It was really difficult to get attention of or help from the employees. Due to lack of decent costumer experience, I stopped going to Best Buy after that visit.

Last week I visited Best Buy once again in order to look for a new laptop. My intention was to check the laptops out at Best Buy and purchase it online once picking it. I didn't have much against Best Buy; however I didn't want to pay sales tax either when I had other options such as Amazon (NASDAQ:AMZN). As soon as I walked into the store, I was greeted by two of their employees with big smiles on their faces. They wished me a good evening and asked me if they could help me with anything. The isles looked far more organized and appealing than they did a few years ago. Every time I walked into a section, there was another employee approaching me with a smile, asking me if he or she can help me with anything. When I asked them questions about certain items, they were very friendly, helpful and knowledgeable. A big change from a few years ago!

I don't know at what point in the last few years that these changes happened. It looks to me like Best Buy is now focusing on customer experience more than ever. The company is now hiring the right people and making sure that the clients feel welcomed and helped during their shopping experience. The store itself looks much better than it did a few years ago and it was very easy to find what I was looking for. At the end, I bought the laptop I was looking for at Best Buy, even though this wasn't my intention in the first place. I believe that once Amazon starts charging people for sales tax, Best Buy will retain more of the costumers that come to its stores just to check out the products before buying them online (i.e., the showroom effect).

A lot of people talk about how Amazon will kill every retailer out there, and I agree that Amazon will continue to gain market share, however, I don't think that online shopping is the end of the story. There are still plenty of people who enjoy going outside of their homes, driving to the nearest mall, checking things out with their hands and "naked eyes" before buying a product. There are still plenty of people that wouldn't give up from full fledge shopping experience full of real human interactions for online shopping. I believe that shopping is not all about utility; it is also a hobby for millions and this hobby includes actually getting out of one's home. At the moment, when they buy their items online, shoppers can save about 8-10% depending on where they live because online retailers don't collect sales tax in most states. I don't think many states will let online retailers to get away with that for a long time. Currently many local governments are desperate for extra income, and online shopping can be a great source for them. Once online shoppers start charging sales tax, their hype will slow down significantly.

Besides, many people seem to forget that Best Buy has an online store too. A lot of times people fall into trap of believing that Best Buy generates all its revenues from its regular stores. I don't think Best Buy will beat Amazon in revenues or market share; however I don't expect them Amazon to totally wipe out Best Buy either. Many people simply expect Best Buy to be driven out of business just in the same way Circuit City was a few years ago.

Best Buy is closing a large number of stores. This may be good for the company in the long run as demand-per-existing-store is likely to increase as Best Buy stores move farther away from saturation in many markets. Hopefully the company will be getting rid of less profitable stores and keeping the more profitable ones, which should increase the overall profitability of the company.

Best buy is expected to earn $3.55 per share in 2012 and $3.63 per share in 2013. Considering the loss of $3.36 the company took in the last 4 quarters, this will be a breeze for the company. This provides the company with a forward P/E ratio of 5. If the company really meets the analyst estimates, it may have an upside of more than 50%. The stock lost 41% of its value in the last 12 months, and it could go back to where it was a year ago or even higher. The biggest concern for Best Buy is falling same-store sales but I believe that these numbers are near bottoming. If the company continues to focus on shopping experience and customer satisfaction, there is no reason for it to keep losing customers at a rate we have seen recently. Furthermore, performance of Best Buy's new stores, particularly outside of US will also determine the fate of the company.

I believe that Best Buy is not in as bad of a shape as many people believe it to be. The company still has a solid balance finances and it has every source to survive the crisis it's going through right now.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BBY over the next 72 hours.

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