Why Best Buy Will Never Be Great Again

Best Buy
Best Buy

Shares of Best Buy (BBY) hit a two-year low earlier this week, after the company posted disappointing quarterly results.

Oh, it was ugly. Revenue was flat, as Wall Street was expecting more than the $11.347 billion Best Buy rang up during the summer period. Operating profits fell by 30%, and the consumer electronics retailer's earnings per share of $0.47 fell well short of both the $0.60 it earned a year earlier and the $0.53 that analysts were settling for this time around.

The struggling retailer can point to success in selling more appliances and mobile computing devices than it did a year ago, but the sum of its parts stinks. Comparable-store sales fell 2.8% during the period. This isn't a fluke. Comps have now fallen in each of the past five quarters.

Best Buy has fallen, and good ol' blue and yellow can't get up.

Why Best Buy Is Headed for Extinction

If this was just a recessionary lull, it would be easy to play the contrarian and jump on the stock. Best Buy at just eight times trailing earnings? Wow!

Unfortunately, the headwinds aren't going away. Digital distribution is here to stay, and that's bad news for the rows of CDs, DVDs, books, and video games at your local Best Buy. The company may be perfectly fine selling you MP3 players, Web-tethered televisions, e-readers, and Wi-Fi-backed gaming systems, but these also happen to be the same weapons that wean a shopper from Best Buy itself.

Think about that. After you buy a portable media player, why would you ever drive out to Best Buy for a CD or a DVD when a digital download is cheaper and more convenient?

These aren't the only examples of Best Buy selling the tools that will lead to its eventual extinction.

Best Buy loves smartphones so much that it's opening smaller Best Buy Mobile stores that only sell wireless handsets and accessories.

Armed with these high-tech handsets, it's easy for a shopper to check if they're paying more at Best Buy than they would at a local retailer or the countless number of e-commerce alternatives. You don't need to be a rocket scientist to see the problem here. There are plenty of free barcode scanning apps, where all you have to do is zap a picture of a product's UPC label. In a few seconds, you'll be reminded why you're making a big mistake if you head to a checkout register. Why do you think they call them smart phones?

Taking on Amazon.com? Meh.

Best Buy would like investors to believe the Internet is more of an opportunity than a threat. Online domestic revenue climbed 13% in its fiscal second quarter! That may seem encouraging until you see that Amazon.com's (AMZN) net sales soared 51% in its latest quarter.

Best Buy is living in denial when it comes to cyberspace. The retailer made waves last week when it introduced Best Buy Marketplace, a platform that will allow trusted third-party merchants sell their wares through BestBuy.com.

Bulls feel that Best Buy is throwing down the gauntlet in Amazon's direction, but I don't see it that way.

Yes, it's true that Amazon has assisted outside merchants for years. The thing is that Amazon's low overhead makes it easy to compete against its vendors, and merchants are cool with that because of Amazon's reach and its stellar fulfillment reputation. What will happen when third-party merchants begin underselling Best Buy (which should be easy)?

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It won't all be overlap. Best Buy expects the new marketplace to add roughly 33% more items to its virtual storefront. How will shoppers know they can find all of this extra stuff at BestBuy.com? Why will they even bother when they know that Amazon.com and eBay (EBAY) stock pretty much anything that they could possibly want to order online?

Keep in mind that this is the same Best Buy that bought Napster and hasn't been able to grow the music subscription service. This is the same retailer that teamed up with CinemaNow two years ago, and even Wal-Mart's (WMT) Vudu has passed it when it comes to digital video.

Maybe it's just me, but when stodgy old Wal-Mart is flicking its high beams at you because you're driving too slow, it's probably a good time to take the next exit off the information superhighway.

There's no way out for Best Buy.

The easy fix would be to follow the nimbler players into appliances and furniture, but it can't just transform itself overnight into a bigger box version of Conn's (CONN) or hhgregg (HGG). Besides, big-ticket items lead to infrequent visits. It was the light media items that kept folks coming back to Best Buy for the latest release every week. Sadly, that's gone forever in this digital revolution -- and it has taken the Best Buy that you remember with it.

Unless it finds a way out, Best Buy will continue to sell the weapons and ammo that will eventually find it joining that big old Circuit City up in the sky.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Best Buy and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Wal-Mart, hhgregg, eBay, and Amazon.com, as well as creating a diagonal call position in Wal-Mart.

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