What's Really Killing Best Buy?

Everybody knows Best Buy's (NYS: BBY) seen better days. Many commentators have been attributing Best Buy's current ill health to Amazon.com's (NAS: AMZN) formidable competition in electronics. It's easy to buy that theory because it makes perfect logical sense, but wait: It's only one part of Best Buy's problem.

Think about it. Amazon.com has been around for a long, long while; it didn't suddenly achieve uber-greatness in the last year or so. Until January 2009, Circuit City was kicking around out there, too. In other words, other factors have changed, and they're all killing Best Buy.

Changing of the guard
Forbes contributor Larry Downes doesn't buy the "killer Amazonian" excuse for Best Buy's troubles, either. He recently published a piece pointing out that Best Buy's customer service (and customer comprehension) has gone down the tubes since CEO Brian Dunn took over the helm. That's a huge deal; for years, Best Buy's goal to build its competitive strength and differentiation was specifically anchored on providing a customer-centric shopping experience.

That's no small ding against Best Buy. Former CEO Brad Anderson, who retired in mid-2009, tried out innovative approaches (such as the Results-Only Work Environment experiment) that it's now tempting to believe Dunn has either abandoned or botched.

Dunn has attempted to defend Best Buy's honor against the Downes commentary on the Web; my Foolish colleague Rick Munarriz covered the controversy, pointing out Dunn's move was a big mistake. Stuff's going wrong, and needs to be fixed.

Meanwhile, you've got to wonder if Best Buy's brewing problems on Dunn's watch have been camouflaged by the fact that Circuit City disappeared from the retail landscape. Market share flowed to its one major big-box alternative, regardless of whether customers were really excited or happy to be at Best Buy or not.

The ease of gaining that market share might have fooled management (and, unfortunately, investors) into thinking Best Buy was executing just fine. I know I thought Best Buy was still a contender for quite a while, and even suspected it was a bargain -- until I started noticing shocking stumbles and began to suspect its better days probably were behind it.

When times are tough, retailers still need to deliver "wow"
If you look at Best Buy's annual results for the last several years, you'll see that sales dropped off badly in the fiscal year ended February 2011. I'd contend that another facet of Best Buy's toxic cocktail of problems is the lackluster U.S. economy. High unemployment and limited incomes simply can't support scads of stand-alone electronics retailers anymore.

A major piece of the puzzle is that the retail landscape remains oversaturated with big-box retailers that feasted on the bubbly economy (and consumers' feeding frenzies). The ugliness is still slowly playing out. I'd avoid shares of RadioShack (NYS: RSH) , Conn's (NAS: CONN) , and hhgregg (NYS: HGG) , too. With the exception of RadioShack, they're all trading at low PEG ratios, but hey: They're also all shopping for a finite number of bargain-hunting customers.

To add some anecdotal color here, I recently went looking for some items at Best Buy and hhgregg, and was extremely underwhelmed by both experiences. The often-repeated theory that electronics retailers like these are simply "showrooms" for online retailers like Amazon sounds about right -- and only if you want to look at gadgets every other store has. There was absolutely no "wow" factor in my browsing experiences.

Beware Best Buy stock
Best Buy's trading at just seven times forward earnings and sports a PEG ratio of 0.87. That might sound like a beaten-down value stock if there was good reason to believe a growth-oriented turnaround was in the works. Right now, that looks exceedingly unlikely. Investors should beware of Best Buy shares; some stocks are "cheap" for a reason.

What do you think is really killing Best Buy? Sound off in the comments box below. And if you're looking for more retail-related reading, download our report "The Real Cash Kings Changing the Face of Retail," absolutely free.

At the time thisarticle was published Alyce Lomax does not own shares of any of the companies mentioned in her personal portfolio. The Motley Fool owns shares of Amazon.com, RadioShack, and Best Buy. Motley Fool newsletter services have recommended buying shares of hhgregg and Amazon.com. Motley Fool newsletter services have recommended writing covered calls in Best Buy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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