Best Buy Still Doesn't Get It

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Best BuyIt's been three months since I argued that Best Buy (BBY) will never be great again.

So far, so gloom: The consumer electronics retailer's latest quarter was another disaster.

Revenue rose by less than 2% to $12.1 billion. Earnings, adjusted for a one-time restructuring charge, fell to $0.47 a share, well below both the $0.54 a share that it posted a year earlier and the $0.51 a share in net income that analysts were targeting.

Best Buy can point to a 0.3% gain in store-level comps, but let's not go assuming that its stores are full again. The 20% growth in BestBuy.com Internet sales is pro-rated among its physical stores in calculating same-store sales. It's a deceptive tactic, albeit one that many retailers use.

Either way, what good is a 0.3% gain in comps after a 3.3% decline during last year's fiscal third quarter? All this means is that Best Buy is still not selling as much at the store level as it was two years ago, when there was an actual recession taking place.

Brother, Can You Spare an HDTV?

Best Buy credits gains in tablets, appliances, e-book readers, mobile phones, and movies for its slightly positive performance. Weakness in digital imaging and video games held the retailer back.

However, the really problematic part of this report is that margins continue to slide. You don't like to see revenue growing faster than earnings -- or, in this case, Best Buy's top line not sinking as deeply as its bottom line. When less of every dollar a company generates in revenue squeezes its way down to the earnings line, it means that a retailer is either marking down its merchandise or consumers are gravitating toward products that historically carry lower profit margins.

Best Buy was hoping that international expansion would help offset its mature stateside presence, but same-store sales actually fell overseas during the quarter.

This isn't a very encouraging situation, and it's easy to see why Best Buy shares fell sharply after the company announced its results on Tuesday morning.

Future Shock

It's hard to get excited about the company's near-term prospects. The midpoints of its guidance for revenue and adjusted operating profit call for declines this fiscal year. Gross margins will also fall.
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Best Buy's worst fears are coming to fruition. The same shoppers whom it has armed over the years with smartphones, tablets, and laptops are now using those devices to find better prices online. Even when folks do walk into a store, they can seamlessly compare prices on their smartphone to make sure that they're getting the lowest price.

More often than not, the better deal can be found elsewhere.

Investors encouraged by Best Buy's reasonably healthy 20% growth in online sales may want to consider that larger e-tailer Amazon.com (AMZN) is growing twice as fast.

Best Buy's future isn't going to get any easier than its recent past.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Amazon.com and Best Buy. Motley Fool newsletter services have recommended buying shares of Amazon.com and writing covered calls in Best Buy.

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