The Fall of Best Buy

Whether it was to get a new PlayStation game or just to gawk at the newest big TVs, I used to love going to Best Buy. I even worked there for a while when I was in school. It paid pretty well and had a sweet discount too. These days I can’t even remember the last time I was inside one of their stores. I’m not alone either; net income has fallen from $1 billion in 2009 to a loss of $1.2 billion last year, and the company’s share price has dropped from $47 in mid 2010 to below $20. Yesterday Dick Schulze, the man who founded the company, was its CEO until 2002, and its Chairman until June, announced he is seeking to buy out the company. Aside from the challenge of arranging at least $9 billion to complete the deal, is there even then is there anything that can be realistically done to bring Best Buy back to its former glory?

It used to be you had to go to Best Buy (or Circuit City, or others) if you wanted a computer or a nice TV. Wal-Mart, Target, and other stores didn’t sell them, and if they did the selection was poor at best. Best Buy’s differentiating factor was that its employees were supposedly more knowledgeable and that it had the installation and after-sale services the others did not. This was also when a 42-inch TV was $2000+ and weighed 50 pounds. Now you can just do all your research online and throw a new Samsung LED in your cart on Amazon while sitting at home half naked taking pulls of Sailor Jerry. And if it breaks, you just buy a new one.

If you walk into a Wal-Mart and Target now, the electronics section even looks like a small Best Buy. And who cares about getting it installed? Most stuff now basically hooks itself up.

Best Buy’s turnaround strategy to date has essentially been to become more like RadioShack and to double down on the strategy of trying to convince people they are too stupid to plug in their own electronics.

Best Buy's retail store strategy is to increase points of presence, while decreasing overall square footage, for increased flexibility in a multi-channel environment. The company intends to remodel key stores with a new Connected Store format in fiscal 2013, and to continue to build out the successful Best Buy Mobile small format stores throughout the U.S.

Geek Squad, Best Buy's 24-hour tech support task force, and AARP today announced the launch of a new program that provides millions of AARP members nationwide access to advice and special discounts on Geek Squad services.

Aside from being able to see and touch new toys before we buy them, do we even need standalone electronics stores like Best Buy anymore? If Best Buy is to stick around, what can it do to keep from going the way of Circuit City, CompUSA, and others?
 

I think they should ditch the brick-and-mortar stores, fire 90% of employees, and focus on the Geek Squad part of the business. If I buy a laptop or tablet from Walmart, Amazon, or eBay, there's really nowhere to take it for repairs (ie: A motherboard swap). They have the resources to compete with all the mom and pop computer repair stores, but their retail business is dead. It's time to focus on the consumer service side of the firm.

 

Went into Bestbuy yesterday to buy a pair of iPhone headphones. I assume Bestbuy is only earning a couple dollars off the $40 purchase, since it's an Apple product. For the first time, I questioned getting the 2 year insurance not because of the price ($9), but the likelihood of Bestbuy being able to honor the insurance two years down the line. Insurance policies are the first to go come a bankruptcy.

I agree with previous posters that Bestbuy needs to become a services firm. Bestbuy needs to find a way to improve margins on Geeksquad services, because there's no way I'll pay $320 for a motherboard replacement when new laptops are $800. Laptop sales and TV sales have no shot in the future, especially when you can test them in store for free and then buy them for less online. I fear the day when Bestbuy goes out. The last thing I'd want to do is to buy a laptop/TV online and hope that it looks like the photo online.

 

Best Buy is the internet's showroom. I used to love to go there, but we live in a different consumer-era compared to the one of 15 years ago.

I used to like browsing thru DVDs. Nowadays, anyone can get a movie from Netflix, or ITunes and they can get it from their couch.

I used to like to see all of the different computer games at the store, but nowadays, there are tons of game review sites on the web, and once again, you can get these game over the net.

I used to checkout the different computer configurations, but today most people have moved to a narrow range of laptops, and desktops are primarily used in offices only.

It used to be a big event to travel 40 minutes to a Best Buy, and I lived in suburban DC. Now there is one a mile from my old house. They have sprouted up everywhere. I live in Virginia Beach, and there are two Best Buys, both of which I could get to in 10 minutes.

Best Buy tries to push too many products. Most people don't go into what I would call "the back left corner", but there you will find outdated vacuum parts, nylon rope, and auto supplies. They tried to become the retailer of EVERYTHING that passes an electron through it. Washing machines and car stereos are things I would never consider going to Best Buy to purchase, and to the core electronic tv/computer enthusiast, this shit just clutters up the store. The stores are increasingly disorganized, and the staff is rarely knowledgeable.

It was a good ride, but I think Best Buy is going the way of Blockbuster. They will try to kid themselves into thinking they can make a store like Apple's, but it will just delay the inevitable.

 

It's kind of sad that most of us guys grew up thinking this was the greatest store ever, and soon, we will have no where to go to shop.

  • eBay killed pawn shops and garage sales
  • Apple killed music stores
  • Zappos killed shoe stores
  • Amazon killed Best Buy, Barnes & Noble, and Circuit city
  • Netflix killed Blockbuster
  • Walmart killed pretty much everything
 
BTbanker:
It's kind of sad that most of us guys grew up thinking this was the greatest store ever, and soon, we will have no where to go to shop.
  • eBay killed pawn shops and garage sales
  • Apple killed music stores
  • Zappos killed shoe stores
  • Amazon killed Best Buy, Barnes & Noble, and Circuit city
  • Netflix killed Blockbuster
  • Walmart killed pretty much everything
who killed JFK
 

I worked at Best Buy during the fall of Circuit City and, honestly, I could see the change in culture occur in front of my eyes. It was like they were the proud victors and decided to just 'take over' the market. Became significantly more aggressive, abused their employees IMO, and pushed Geek Squad and other useless, rip-off services ever harder.

Geek Squad is stupid and useless for the most part. 'Laptop Optimization'? Please. Studies have actually found those to be - at best - useless. Oftentimes they are detrimental to computer performance.

And don't even get me started about the usurious rates on the financing plans, and the way we were forced to push them onto customers who had plenty of cash anyway.

And I remember how they told us to take pride in the fact that we weren't paid commissions on sales, unlike the people at Circuit City. But the way they pushed us to sell useless software made many customers think we were completely on commission - a friend of mine literally begged a customer to buy anti-virus software once because he was scared of his manager. I would accept their 'no commissions' policy if they actually paid their employees a decent wage. But salespersons ten years my senior were making maybe a dollar or so more than me, a high schooler. What a joke of a company.

 

This is stupid. You can technically get anything you ever need from Amazon, ebay, and whatever grocery site you want and it'll be cost effective. Obviously god's given me two legs to walk outside my house and enjoy fanboying in a tech store. I like to see cameras in person and buy video games myself. Hard copies of discs are the best and looking at the back of video game covers are cool too.

 

Best Buy is now totally dependent on the technologically illiterate...any young/tech-savvy person will be on Amazon, Newegg, etc.

Margins suck on big ticket items like TVs. So they need to push add-ons, e.g. the $100 Monster Cables, warranties, computer "optimizations". Again, tech-savvy people don't fall for this stuff. They also don't pay for installations, most of which now involve plugging a device in.

The people I know who still shop at Best Buy are members of the 50+ demographic who thought, "This internet thing is just a fad," and have resolved to eschew technological progress. If they aren't part of this demographic, the consumer is unusually docile, and will go ask a Best Buy salesman, "What computer should I get?"

The consumer base is shrinking. These people are dying off. The new generation isn't tied to the idea of buying electronics from an electronics store.

 

I still believe the majority of young people are technically illiterate. There are ads all the time for shit like mycleanpc.com and doublemyspeed.com. Go to a high school and ask what operating system their computer uses and 80% of the guys and 95% of the girls will give you a blank stare. Same kids that can't do math I did in 6th grade.

Best Buy had a serious leadership problem for a while. I personally knew the now-ousted CEO (affairs with multiple women covered up with company money) and he was a total idiot. Like fat white guy who gets ghetto rims and a chrome grille on his Escalade stupid. Didn't even go to college. When you hire people like that to run your company you've already screwed the pooch.

 
ChrisHansen:
I still believe the majority of young people are technically illiterate. There are ads all the time for shit like mycleanpc.com and doublemyspeed.com. Go to a high school and ask what operating system their computer uses and 80% of the guys and 95% of the girls will give you a blank stare. Same kids that can't do math I did in 6th grade.

I honestly think this is the key to Apple's success. It removed need for technical knowledge needed to operate technology. No manual patching. No defragmenting. No antivirus/malware. Closed garden design so that everything works when you plug it in. No need to upgrade parts- just buy a new one.

But I think people have at least gotten cynical enough to avoid Best Buy's high margin traps. Even my grandparents know that it's cheaper to pay a kid on their block to connect their blu-ray player than it is for a Best Buy tech to come out. So maybe the new customer's aren't tech literate- they are just more skeptical.

 

Why the hell would Amazon ever buy BBY? Herb Greenberg is smoking crack. Amazon has bigger fish to dry with its AWS business and its digital content initiatives.

What really gets my goat is everyone's obsession with sales taxes and claims that AMZN will suffer due to states imposing sales taxes. Guess what...they already collect sales tax or the VAT equivalent on ~50% of their revenues and they are still growing like a weed. It's not about lower prices. That's just one component. It's also about having the broadest selection of goods and prvoviding a higher level of convenience.

Yes, their margins suck and yes it trades at an absurd multiple. But the street doesn't care. Bezos gets a free pass because he is the ultimate disruptor. And the investments being made arent speculative...they're investing to fulfill real demand. Things like fulfillment centers, datacenters to support AWS, acquirng content for its Kindle ecosystem.

There will be a point in time when they step off the gas pedal just slightly and margins will reach an inflection point and head north. When that happens, the stock is going to go bonkers.

The one caveat is this smartphone nonsense. That would be a bad move in my opinion. Their content does not lend itself well to smaller form factors. They should stop at tablets.

 
jb7049:
Why the hell would Amazon ever buy BBY? Herb Greenberg is smoking crack. Amazon has bigger fish to dry with its AWS business and its digital content initiatives.

What really gets my goat is everyone's obsession with sales taxes and claims that AMZN will suffer due to states imposing sales taxes. Guess what...they already collect sales tax or the VAT equivalent on ~50% of their revenues and they are still growing like a weed. It's not about lower prices. That's just one component. It's also about having the broadest selection of goods and prvoviding a higher level of convenience.

Yes, their margins suck and yes it trades at an absurd multiple. But the street doesn't care. Bezos gets a free pass because he is the ultimate disruptor. And the investments being made arent speculative...they're investing to fulfill real demand. Things like fulfillment centers, datacenters to support AWS, acquirng content for its Kindle ecosystem.

There will be a point in time when they step off the gas pedal just slightly and margins will reach an inflection point and head north. When that happens, the stock is going to go bonkers.

The one caveat is this smartphone nonsense. That would be a bad move in my opinion. Their content does not lend itself well to smaller form factors. They should stop at tablets.

Agree with this. I'm long AMZN

 
jb7049:
Why the hell would Amazon ever buy BBY? Herb Greenberg is smoking crack. Amazon has bigger fish to dry with its AWS business and its digital content initiatives.

What really gets my goat is everyone's obsession with sales taxes and claims that AMZN will suffer due to states imposing sales taxes. Guess what...they already collect sales tax or the VAT equivalent on ~50% of their revenues and they are still growing like a weed. It's not about lower prices. That's just one component. It's also about having the broadest selection of goods and prvoviding a higher level of convenience.

Yes, their margins suck and yes it trades at an absurd multiple. But the street doesn't care. Bezos gets a free pass because he is the ultimate disruptor. And the investments being made arent speculative...they're investing to fulfill real demand. Things like fulfillment centers, datacenters to support AWS, acquirng content for its Kindle ecosystem.

There will be a point in time when they step off the gas pedal just slightly and margins will reach an inflection point and head north. When that happens, the stock is going to go bonkers.

The one caveat is this smartphone nonsense. That would be a bad move in my opinion. Their content does not lend itself well to smaller form factors. They should stop at tablets.

You have a goat?!

 
FutureWaller:
I was reading an article by CNBC ( http://www.cnbc.com/id/48441990 ) and just wanted to get a feel on what the WSO community felt about the situation. Personally, I think Best Buy is a dead man walking in the electronics industry with many people, including myself, going there to check out products and purchase them online at the cheapest price. Best Buy will fall..it just depends how they want to go out.

What do you guys think?

BBY used to be good but it has gone downhill. Yesterday I went there to try getting a pretty famous film from the 80s, and they didn't even have it in their system. That's right, not just not in stock or not on the shelf, but not even in their system. What a joke. Just a small anecdote to add to the mix. I fear BBY will endure the same fate as Blockbuster (which btw I sorely miss).

 

Funny you should mention blockbuster...About a year ago I was in a BBY and I said to my wife that all this crap BBY is now selling (magazines, candy, etc) reminded me of Blockbuster and that it was a huge red flag and that BBY was probably headed for disaster like Blockbuster.

Anytime you see a business start selling candy and other crap not in their wheelhouse...probably a safe bet to short the stock.

 

Best Buy is a bankruptcy and this has been obvious for at least the last 5 years. When it goes bankrupt, I don't know, but it will (not an if scenario). There is no reason for any strategic to buy this company. If you check the history of the industry, every major consumer electronics company going back to the 1950s has eventually gone bankrupt. Every. Single. One. It is a bad business model, and that's not even accounting for Amazon's impact.

Circuit City was an awesome short. And what was really awesome about it was that between about 2005 / 2006 and 2008 when it went tits up, the company repurchased about $600 million of stock (or something like that) at 52-week highs. Well done gentlemen, well done.

 

True, it is bound to go bankrupt...but once best buy closes where will consumer go to physically touch and test products? I think this is the older generation (35+) who needs to do this most, and if Amazon had the best buy facilities, they would be a double threat in the market.

A couple years ago best buy tried to enter china but eventually closed...not because best buy didnt have great stores and a consumer friendly layout to test and feel out products,, but because china consumers would go there just for that reason, and then go online or there local mom and pap store and purchase them at near cost. The same situation is now occuring in the US but at a much larger scale for best buy, and selling is really the only other option they have or else its bank will break soon enough...What im getting at is it should try and learn from there mistakes in the past and try and make something happen to survive.

 

It would be a very bad idea for AMZN to buy BBY -- Best Buy is not going to earn their cost of capital over time. It's a very asset intensive, high fixed cost business that is losing market. People can just go to COST or WMT or whatever to shop. BBY is beseiged at every turn -- you can buy phones at carrier stores and everywhere else now, download movies and games, buy TVs, DVD players, cameras, etc. on AMZN. It's game over. Just a matter of time.

Hard to make something happen when you have a national or near national footprint (I forget) with high cost leases. It's like trying to turn the titanic. When big box breaks it's very ugly. Best play (eventually) would be a financial buyer to buy it at a firesale and liquidate any real estate the company may have.

 

I think BBY in its current form is a dead man walking. Not sure if there is any hidden value on the company's balance sheet or not but I doubt it is much. I admit I have not looked at their financials, but I do know that they have a ton of long-term leases for many of their stores. Not only is that bad because they stretch far into the future, but it also means they probably do not own much real estate.

Going into a BBY store is not a great experience. They try to sell you all these little gimmicks with everything you buy. "Sir, would you like the XYZ plan....subscription....product protection....etc." All you wanted to do was buy your damn laptop (or whatever) and get the f&$k out of the store.

Now, I did buy a nice 55" Samsung TV there last summer. However, the only reason I bought it is because it was 30% off, then I got an additional discount for using BBY financing for which I got 0% over four years. I paid the TV off in less than a year with no extra charges. All those extra bennies made it cheaper than Amazon.

The only way I can see a business like BBY succeeding is if they amp up their customer service and keep prices at least in the ballpark with Amazon. What do I mean? Imagine this: a TV on Amazon costs $899 with free second-day shipping. The same TV costs $1049 at BBY, but if you go into a BBY store and buy the TV one afternoon then BBY will guarantee same-day delivery as well as free installation. Note: They also have to do a good job installing it (i.e. get it integrated with all your other home entertainment products).

This kind of thing might get people to shell out the extra $150 over Amazon.com. Something like this creates value for the customer than Amazon cannot provide. Simply trying to compete on price will not. Whether shifting BBY's business model to something like this is feasible given their situation is something that someone with more inside knowledge than myself will have to answer.

 

Best Buy- Amazon's physical showroom floor*. Buying this company is about as sensible as buying Barnes and Nobles. Interestingly enough, there is no meat in the announcement. No details, no financing lined up. No known group(s) of buyers. No due diligence has been done. Just an announcement of a buyout offer, accompanied by a "confident" letter from Credit Suisse, at a ridiculous 36% premium! Maybe this was some ploy so Richard Schulze could unload his remaining shares in this terminal sick company.

*h/t Zerohedge

Bene qui latuit, bene vixit- Ovid
 
rls:
Best Buy- Amazon's physical showroom floor*. Buying this company is about as sensible as buying Barnes and Nobles. Interestingly enough, there is no meat in the announcement. No details, no financing lined up. No known group(s) of buyers. No due diligence has been done. Just an announcement of a buyout offer, accompanied by a "confident" letter from Credit Suisse, at a ridiculous 36% premium! Maybe this was some ploy so Richard Schulze could unload his remaining shares in this terminal sick company.

*h/t Zerohedge

Hey, in the WSJ article, they assert there is a PE firm and some debt financing for the deal...

The difference between successful people and others is largely a habit - a controlled habit of doing every task better, faster and more efficiently.
 

never pat a burning dog... not a fan of this company

however, from a trading perspective:

the 2009 oct trend line is still intact and since imp vol has spiked id bet on a pop on the upside soon since its quite oversold. my recommendation is to sell puts at 55 bucks and buy $65 calls (call/put ratio: 2:1) it almost finances itself and gives you a nice participation rate on the upside....

 

I really like how they said it on CNBC today: 'BestBuy is just a retail representative of everything you can get on Amazon for cheeper."

A perfect example: A month ago I found my new 55" LG TV in BestBuy and then bought it for $500 less on Amazon with free delivery.

I don't like the stock.

"If you want to succeed in this life, you need to understand that duty comes before rights and that responsibility precedes opportunity."
 
collegekid89:
The Best Buy owner announced to buy-back all the shares in the market $24-26. What if someone refused to sell their shares? Or what if someone said they would only sell for $30. How would the owner take the company private?

Do you realize that shares in a company are votes? The reason why they've targeted this price is because they feel that they can get at least 51% cooperation with their plan. The 49% of the folks "holding out for $30 will get what the majority decides is the fair buyout price.

Your rationale reminds me of the Japanese army dudes who were picked up from remote islands in the Philippines years after WWII was over, but they were still wanted to fight and were willing to die for Tojo.

 

I don't get it. Why the fuck didn't they tank today.

i short them a couple of days ago with the expectation that their shitty earnings will crash the stock, yet they were down what? 1%

Short sellers are definitely not covering so the only thing I can think of is them being a takeover target but who wants to buy this piece of shit.

What am i missing here?

 
alreadyrich:
I don't get it. Why the fuck didn't they tank today.

i short them a couple of days ago with the expectation that their shitty earnings will crash the stock, yet they were down what? 1%

Short sellers are definitely not covering so the only thing I can think of is them being a takeover target but who wants to buy this piece of shit.

What am i missing here?

was down 6% this morning so I'd guess if no ones covering, than VALUE investors are stepping in.

 

Get a proxy battle going and have them chop up and sell off all their assets.

“...all truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” - Schopenhauer
 

You know what is funny? If he really wanted to take the company private, it would cost more than ~24-26 per share, even at these levels. He is not even paying 5x ebitda with those valuations. Sucks. As many have asserted, Best Buy is Amazon's showroom, may be harsh, but I think it is the truth.

The difference between successful people and others is largely a habit - a controlled habit of doing every task better, faster and more efficiently.
 

How can they turn a profit in the future? Even with the best management team, I don't see how this is possible. People aren't stupid enough to buy HDMI cables from Best Buy for 100 dollars when they can get them online for 3 dollars - and that seems to be their business model, along with the 3 year insurance for a product that will become obsolete in 1 year.

 
wannabeaballer:
How can they turn a profit in the future? Even with the best management team, I don't see how this is possible. People aren't stupid enough to buy HDMI cables from Best Buy for 100 dollars when they can get them online for 3 dollars - and that seems to be their business model, along with the 3 year insurance for a product that will become obsolete in 1 year.
For starters, I think they need to embrace the showrooming. Put up kiosks all across the store that say "BUY IT ONLINE HERE". Heck, even consider hammering out some sort of strategic arrangement with Amazon, maybe something like "Bestbuy.com: powered by Amazon".

Also Best Buy needs to stop selling appliances and convert the CD/DVD section to burning kiosks where people just burn their own CD. Only 5% of the company's revenues come from appliances, but it has as much floor space as a computers section. Physical media same store sales fell 13% YoY 2 years ago and 16% last year. Stocking and sorting CDs and DVDs, as well as helping Aunt Beth find her favorite Phil Collins CD, is a huge waste of labor.

Best Buy is the same store they were 10 years ago. They haven't changed with the times. Maybe they could start selling solar panels, electric cars, or whatever the next thing in technology is. Because the next thing in technology is certainly not CDs.

 

Ya the one to short today is HP, selling tomorrow morning after ~15 minutes and then buying after 30.

“...all truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” - Schopenhauer
 

Three retailers: Amazon, Newegg, and Tigerdirect. In the long run Best Buy is screwed. Our generation is becoming much more price-conscious, and combined with our internet savvy, companies like Best Buy will have to either make some huge changes or they'll die. They just can't compete. Why would I buy from Best Buy when I can get the product I want cheaper from Amazon, I have the reviews at my fingertips on Amazon, I don't have to leave my house with Amazon, and Amazon gives me free 2 day shipping for $80/year (plus a bunch of other benefits)?

And factor in that Amazon snags new students with their Prime membership for $40/year. Sorry, I'm not an expert, but Best Buy is definitely not a long-term investment I'd be confident in.

"You stop being an asshole when it sucks to be you." -IlliniProgrammer "Your grammar made me wish I'd been aborted." -happypantsmcgee
 

I never liked best buy. I always preferred Circuit City, but now i shop online for everything.

IMO they effed themselves when they gouged their loyal customers for chinese made cables.

as far as their stock goes, i'm short - i see them with half their mkt value in 5 years, half as many stores.

 

not much more room for growth... its turned around and had its up-swing. Upside downside case if your talking equities. Is it a growth story?? don't think so.. I'll start you off... holiday performance might be good. Also, best buy is competitive with internet prices and you get to see the product and use it before purchase. Downside - don't think retail numbers will be good as we think by year end..

from there, break-down the store.. they sell a lot.. TV's, Appliances, Computers, Phones, Movies, Accessories, Audio, and etc. I don't know how they do in each sector I can tell you this, I rather buy a washer/dryer at best buy rather than amazon. I rather buy a TV and home entertainment system in the store rather than online, they might not compete with wal-mart or other places with a low price strategy, but they have good quality stuff and make the buy very comfortable with warranty etc. Also, buying a floor model or something that has been on the shelf per say can save you money.

Lastly, the geek squad does really well and the best buy stores are partially fueled by installations, warranty, and repair..

You guys are right about the HDMI cables and the whole shift towards the internet purchase thing, but I don't think this company is driven by an HDMI sales. There is still some stuff that is best to buy in a store because of shipping and customer service. Best Buy offers that sales person for advice and other things that the older generation is not moving away from. The CEO has done a good job turning this store around and there is just some things that Best Buy will never be able to compete with.

Taking everything into account, I would call it a buy, but rather a hold or even a sell with some analyst cases. I think its stable and there's some room for it to go either way, but I wouldn't exactly call it sexxy

Keep the discussion going

 
BTbanker:

BBY should be charging an entry fee, like a movie theater for customers to browse the selection, try out the products, and then go shop online like everyone does.

Total Ackman move. Completely alienate its core customer base.

 

Going the way of Blockbuster and Circuit City.

These types of dead-man-walking companies can sometimes present attractive investment opportunities because they are so hairy and carry such a negative stench that despite the fact that the company is a decaying corpse... given where the market is pricing it, there is value to be had. BBY, IMO, is not one of these companies though.

Most of the attractive death row companies aren't overhead intensive and what the market overlooks is that even if the business shuts down in run-off mode... there is a long tail of revenue that essentially behaves like an annuity stream and given that the annuity stream is essentially bedrock, there is a fantastic risk-return profile on the investment. But once again, a consumer electronics business with a huge retail footprint (read expensive fixed cost base) does not fit that bill.

 
But once again, a consumer electronics business with a huge retail footprint (read expensive fixed cost base) does not fit that bill.

Just to kind of play devil's advocate, from their latest annual it looks like their fixed costs are reported to be about 432 mn (most of which is real estate related), which pale in comparison to their total COGS and SG&A. Do they really have an expensive fixed cost base, relatively speaking?

And on another note, one thing I read was that Google might use a bunch of space (like thousands of sq ft) within Best Buy stores to sell/promote their products (such as Google Glass) and BBY could get a pretty penny from that. Any thoughts on this? It was supposedly just a rumor but not sure if there is any truth at all to it.

 

I highly doubt they'd buy space in Best Buy, though I haven't heard anything for or against it.

They do have those new, mobile showrooms. They were in the news because everyone was wondering why Google had a massive barge hooked up in the SF bay.

"You stop being an asshole when it sucks to be you." -IlliniProgrammer "Your grammar made me wish I'd been aborted." -happypantsmcgee
 

I was speaking in generalities in my above statement.

Looking at the financials...

LTM Financials: $48bn Revs –37bn COGS 11bn Gross Profit –10bn SG&A some other shit $2bn EBITDA

I look at it not as a percentage of COGS+SG&A, but in relation to EBITDA. Because if the volume craters, I'm less concerned with the fact that my overhead is 20% of total costs and more concerned with the fact that I need to find $10 billion to keep my lights on.

Assuming that 100% of COGS are variable (which they are definitely not), it takes is a 16% drop in revenue to get you to a zero EBITDA... for every 1% drop in revenue beyond that, you lose an additional $100 million.

Quickly looking at BBY's 10k, their COGS include: 1. Freight expense (fixed & variable) 2. Vendor allowances/rebates (likely all variable) 3. Payroll and benefits for services employees (definitely large fixed component) 4. Inventory losses (mix, but call it all variable) 5. Markdowns (the more volumes decline the steeper these markdowns get, but lets call it variable)

Very conservatively lets call it a 30/70 fixed/variable mix on COGS. Now you're looking at break-even EBITDA with an 8% decline in revs.... for every 1% beyond that and you lose an additional $200 million.

Look at these revenue declines in the context of other victims of disintermediation or just industry bastards like RIM... and its pretty obvious that proposing these types of declines in revenues won't get you laughed out of the room.

Fixed costs can be scaled back but very slowly and very expensively. Try breaking a 7-12 year lease on a 90k sqft box store that is an anchor in the shopping plaza.

 
Marcus_Halberstram:
Looking at the financials...

I see what you're saying about "break-even revenue declines" and how that's a better way to think about fixed costs. But I'm still not sure how fair it is to assume 30% of COGS is fixed since those items aren't explicitly broken out...but if that is true then I can see how it would be significant. I hope you're right.

 

I don't own Best Buy and have only heard about its stock moves on CNBC. I don't actively follow the company.

I'm just going to say...for those of you who keep citing online retailers, nothing can fully replace the form factor experience of Best Buy and just holding the product. I've bought a personal computer online only to realize I hated the keyboard despite knowing its specs. And yes, you can get next day shipping or whatever, but sometimes people just want to buy the damn thing now. There will always be a place for Best Buy. It's not like Blockbuster where you can literally stream movies now. There's physical inventory involved (I feel the same way about Barnes and Nobles as well).

 
Xepa:

I'm just going to say...for those of you who keep citing online retailers, nothing can fully replace the form factor experience of Best Buy and just holding the product. I've bought a personal computer online only to realize I hated the keyboard despite knowing its specs. And yes, you can get next day shipping or whatever, but sometimes people just want to buy the damn thing now. There will always be a place for Best Buy. It's not like Blockbuster where you can literally stream movies now. There's physical inventory involved (I feel the same way about Barnes and Nobles as well).

Ironically, I agree with your general concept in theory because I'm the same way. I like brick-and-mortar especially when there's little to no price benefit from online shopping. However, I can say that Best Buy's inventory has been inadequate for my needs specifically. For example, I recently purchased a new pair of headphones (made by Grado, which are pretty respected among audiophiles) and BBY simply did not carry them at all, which is kind of embarrassing. I ended up getting them from a large local retailer. The point is, even if you like physical shopping, local retailers have more availability for specialized items and Walmart, Costco, etc. suffice for more common items while offering other benefits too.

 

I'm not saying it's going to die completely, but it's definitely not worth investing in.

"You stop being an asshole when it sucks to be you." -IlliniProgrammer "Your grammar made me wish I'd been aborted." -happypantsmcgee
 
Xepa:

I don't own Best Buy and have only heard about its stock moves on CNBC. I don't actively follow the company.

I'm just going to say...for those of you who keep citing online retailers, nothing can fully replace the form factor experience of Best Buy and just holding the product. I've bought a personal computer online only to realize I hated the keyboard despite knowing its specs. And yes, you can get next day shipping or whatever, but sometimes people just want to buy the damn thing now. There will always be a place for Best Buy. It's not like Blockbuster where you can literally stream movies now. There's physical inventory involved (I feel the same way about Barnes and Nobles as well).

Borders would like a word with you.
 

Marcus, fixed costs work both ways. If revenues increase 1%, you also have a nice jump in EBITDA, and for all we know, the state of the electronics market might be coming back from its trough in recent years. The consumer market still hasn't recovered and people are not as optimistic about its prospects compared to other markets, but eventually this market will come back and when it does, levered players like Best Buy should benefit.

People might consider Amazon and online retailers a major threat, yet at the same time, a lot of capacity left the market with deterioration of Circuit City, Radioshack, etc. I think the market now doesn't fully appreciate the supply dynamics that are in favor of the last remaining big box player in Best Buy. If you believe there is some value to physically going into the store to buy a product where prices are now fairly competitive to online (price matching policies), then there should be room for BBY. I don't know where valuation stands now, but I was buying at $12-16 and got out after a small gain but believe there is still potential for an industry comeback that allows for significant EBITDA growth.

 

Can someone tell me how Radioshack is still in business? I stopped in one the other day, and the inside looks like crap, just completely in shambles and poorly stocked. How do they even compete? I'm really just curious if anyone knows?

 

OP, why bother playing earnings? Cover before earnings, short after if it looks opportune. They might miss earnings estimates, they might hit. If you just want to gamble, get some December OTM puts. Just put up triple however much you're willing to lose. If you're willing to take a 3% loss, put up 9% of your position in puts.

MAJMajor12:

Can someone tell me how Radioshack is still in business? I stopped in one the other day, and the inside looks like crap, just completely in shambles and poorly stocked. How do they even compete? I'm really just curious if anyone knows?

It's lost 85% of it's value in the past 3 years. They're not competing in the slightest. They've closed a decent number of unprofitable stores. Their main moneymakers have to be smartphones now. I'd imagine they'll work on rebranding and turn into the equivalent of something between a Best Buy Mobile and Apple Store in the next few years, that or bankrupt. Tablets, laptops, smartphones, Beats headphones. Literally all they need to sell.

 

Radio Shack reminds me of a Nintendo controller... without the nostalgia... but with the decades worth of sweaty palm grime.

They haven't had any revenue growth in over a decade. And the only reason they've been able to tow the line on revenues is because they've bet the farm on pushing cellular product. In my opinion, the only imbeciles buying cell phones from Radio Shack are our grand parents. I have no basis to speculate on this... but I'd be willing to bet the #1 selling product in Radio Shack stores is that flip phone with the really large buttons that old people can see easily.

As out grandparents die, so too will the Radio Shack business.

And to the person that claimed that Radio Shack has somehow freed up capacity in the industry... that's a joke... thet've had $4bn of revenues since well before I could legally drink. And as for BBY benefiting from Circuit City freeing up capacity, they went BK in 2008. Since then BBY gained ~$5bn in revenues in 2009 and 2010 (quite remarkable given what was going on in the world)... so that ship has also sailed long ago.

 
kfuzion:
OP, why bother playing earnings? Cover before earnings, short after if it looks opportune. They might miss earnings estimates, they might hit. If you just want to gamble, get some December OTM puts. Just put up triple however much you're willing to lose. If you're willing to take a 3% loss, put up 9% of your position in puts.

This is a great question actually...I'm pretty confident BBY is a short, but much less confident of the timing. Currently I have on long dated deep OTM puts. I guess the 'short' answer (no pun intended) to your question is I'm impatient...that may end up costing me, we'll see.

 

Still staying short, OP? I've done more research, only 0.5% of shares are short. Add to this, the long-term trend of BBY going up, PS4 sales, etc. I personally would get out, and wait until it starts falling to go short. There's no need to ride this one up as there is with a lot of small and mid-cap stocks. You'll be able to find shares to short any time.

If you're just looking for trade ideas, go to http://finviz.com , look at the stock screener, narrow down your criteria (by market cap, industry, whatever), look at the big winners and losers. You can hover over a ticker to see a candlestick chart (with 1-day sticks, over a ~6 month period), go through maybe 20 a minute, spend 10 minutes on that, find the most interesting trends, do some research on the best 5-10 you found. Total time, maybe 1 or 2 hours, and you'll have good trades lined up and a few for your watchlist.

 
kfuzion:

Still staying short, OP? I've done more research, only 0.5% of shares are short. Add to this, the long-term trend of BBY going up, PS4 sales, etc.
I *personally* would get out, and wait until it starts falling to go short. There's no need to ride this one up as there is with a lot of small and mid-cap stocks. You'll be able to find shares to short any time.

I'm personally staying short until I see what earnings are. The only people's trading actions I would bother considering are the company's insiders...I don't really care what other investors are doing in terms of considering the company fundamentally.

 

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[quote=patternfinder]Of course, I would just buy in scales. [/quote] See my WSO Blog | my AMA
 

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