More black days are ahead for the blue shirts of Best Buy (BBY).
Shares of the consumer electronics giant were crushed on Tuesday after another disappointing quarter. The stock sunk to levels that Best Buy investors hadn't seen since the 1990s. Then again, it's a safe bet that many of those shareholders wish that they could go back in time to relive the chain's glory years.
Unfortunately, the future doesn't look very encouraging.
Let's go over some of the reasons why Best Buy has fallen to a millennium low -- and why things may get worse.
1. Positive comps and margins are inversely related
CEO Hubert Joly has highlighted two problems that need mending at Best Buy. The chain needs to turn its negative same-store sales into gains. It also has to reverse the problematic trend of declining margins.
The problem here is that it's hard to fix one without making the other worse.
Lowering prices to make the chain competitive with Amazon.com (AMZN) and other cheaper retailers may help drum up sales. The company can overcome the negative comps in volume if electronics shoppers once again see Best Buy as a price leader. The problem with that is that is that gross margins will get clobbered.
The company's brazen decision to allow price matching in some product categories this season may help it boost sales by keeping tire kickers from leaving the store without buying what they want. But it's going to be at the expense of mauling its margins.
It's not Joly's fault. He's only been there for 11 weeks. It's not Best Buy's fault. Online retailers have meager overhead costs, and can pass on those savings to deal-seeking shoppers.
The equation cuts the other way, too. If the plan to boost margins involves trying to get customers to buy more of their insurance plans and services, those same gouged shoppers will want to buy online so they don't get had in person again.
2. Exclusivity won't save the day
A popular way for brick-and-mortar chains to beat online retailers is to offer exclusive merchandise. You won't find IKEA furniture other than through IKEA. Target (TGT) is a great mainstream example. The "cheap chic" department store chain teams up with home and apparel designers for product lines that can only be bought at Tar-jay.
Best Buy wants to play in that sandbox.
During Tuesday's conference call, Best Buy discussed its plan to cash in on Microsoft's (MSFT) Windows 8. Best Buy is stocking 45 PC models that can only be purchased at Best Buy. It may sound like a good plan. The showrooming impact is tripped up because that model can't be priced against the same PC at other retailers. However, these PCs are merely spec sheets. If a computer with similar specs can be had for less elsewhere -- and it probably can be -- Best Buy won't get the sale.
As Best Buy continues to shrink in relevance, manufacturers will have less reason to give a hot product only to Best Buy. The chain will get the leftovers in niches that are commodities anyway.
If Best Buy could have set itself apart with proprietary consumer electronics don't you think that it would have done so with its own Insignia lines?
3. Best Buy is practically groveling
"Encourage everybody to shop at Best Buy between now and Christmas," were Joly's final remarks to analysts during Tuesday's earnings call. "And as you shop there, please give us feedback on your experience, both the good and the bad as we're focused on driving the customer experience now."
"I look forward to your purchases and your feedback."
In that order?
Coming from any other company this would come off as an endearing sendoff heading into the telltale holiday shopping season. But given Best Buy's horrendous fundamentals these days it's hard to tell. If "getting analysts and their families to spend more money at Best Buy" is part of the plan to turn comps positive, don't be surprised if the feedback proves to be as negative as the store-level sales growth will be.
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, Best Buy, and Microsoft. Motley Fool newsletter services have recommended buying shares of Amazon.com and creating a synthetic covered call position in Microsoft.
7 Reasons Best Buy Won't Be Around in 7 Years
Best Buy's Stock Price Falls to a Millennium Low
Showrooming -- the troublesome practice for local store owners that finds potential buyers kicking the tires of products before buying them cheaper online -- isn't going away.
Amazon.com (AMZN) reported a 34% spike in net sales during its first quarter on Thursday. Best Buy doesn't operate on the same fiscal calendar as the leading online retailer, but analysts feel that the company's top line will inch less than 3% higher when it reports next month.
It's not Best Buy's fault. A company with the overhead of manning physical stores can't afford to sell at the prices that nimbler Web-based retailers can offer. The wide availability of the Internet as a research tool also makes the hands-on perspective that local retailers provide less necessary, and in some cases even less desirable.
Some real-world chains are fighting back through exclusivity. Cheap-chic discount department store operator Target (TGT) has been a strong player in stocking up on items that are only available through Target.
Best Buy doesn't have that luxury.
Best Buy confirmed on Thursday that it's killing Best Buy Connect, the retailer's private-label mobile broadband service. It never took off, and the service reportedly had just 11,000 customers. Yes, the company has private labels for home theater and other consumer electronics, but it's not as if the merchandise is considered unique. This isn't Sears (SHLD) with brand equity for its Craftsman tools and Kenmore appliances.
Walk into a Best Buy and check out the racks of CDs, video games, books, and movies. All four of those media platforms are losing physical appeal as those industries go digital.
In Thursday night's quarterly report, Amazon revealed that nine of the 10 best-sellers were digital products. Best Buy may think it's scoring a sale when it sells a tablet or a smartphone, but it's really simply handing over the tools that will result in that shopper relying less on in-store purchases.
Another nugget in Amazon's report is that 130,000 of the books in its virtual marketplace are exclusive to the Kindle Store. Yes, a lot of that is vanity press stuff from authors who couldn't land real publishing deals, but 16 of Amazon's 100 best-selling e-books were exclusive to its store.
Apple (AAPL), on the other hand, is the poster child of the modern ecosystem. The success of iTunes has turned Apple into the country's largest music retailer. There are now hundreds of thousands of apps in the company's iconic App Store.
Best Buy has tried its hand at digital distribution of music and movies -- even to the point of buying Napster and CinemaNow -- but that hasn't panned out. Brick-and-mortar chains just don't have the high-tech appeal to launch cool digital ecosystems.
The worst part about movies, music, books, and games going digital isn't just the empty space that Best Buy will have to fill. The company has enough sharp retail vets to put the space to work with store remodeling plans that are currently in the works.
The worst part of the migration is that these are the items that forced shoppers to come back to Best Buy. You may only need a new washer once every 10 years, but there are always new DVDs hitting the market every Tuesday. New video games, CDs, and books are also always coming out. As more people replace physical media with digital -- and you do realize that Apple and Amazon are selling millions of tablets every passing quarter -- Best Buy will be a less frequent stop for even its most loyal customers.
Best Buy conceded in its most recent report that it will have to get serious about lowering prices in the future. Its aggressive expense-shaving efforts will be partly passed on to shoppers in the form of better pricing.
"We intend to invest some of these cost savings into offering new and improved customer experiences and competitive prices," Best Buy explained last month.
The problem is that it will probably never be able to cut its overhead to the point where it's truly competitive with Amazon and even cheaper e-tailers. This will force Best Buy into sacrificing margins on products, but hoping to make a profit by selling extended warranties, obsolescence insurance, and Geek Squad services. It's a plan that sounds fine on paper, but consumers are already tiring of the hard sell during the checkout process for services that they may never need. If Best Buy sees this as its future, it's underestimating what shoppers do when they're annoyed.
They stop coming back!
hhgregg (HGG) and Conn's (CONN) are some of the rare survivors in this field, and it's because they key in on heavy appliances, furniture, bedding, and even lawn care equipment that's harder to secure cheaper online, given the bulk of the items.
Best Buy naturally sells appliances, but that's just 5% of its business. If Best Buy wants to emphasize big-ticket items that are purchased very infrequently -- thereby taking on the smaller hhgregg and Conn's -- it would probably have to close all but a store or two in each of its major markets. There just isn't enough business for these products to justify Best Buy's existing store base and square footage.
In short, it's not going to happen.
Best Buy may be in the process of closing nearly 50 stores over the next few weeks, but there will be more of that in the future unless trends reverse and positive catalysts emerge.