Best Buy (NYS: BBY) is moving to replicate the RadioShack (NYS: RSH) model in consumer-electronics sales with smaller stores located in strip malls. The goal is to open 800 of these units in areas littered with vacant buildings. It's difficult to see how Best Buy will fare any better against competition from Wal-Mart (NYS: TGT) , Target (NYS: TGT) and Amazon.com (NAS: AMZN) than RadioShack has, though. Now trading at around $1.90, RadioShack is down 80% for 2012. Let's take a closer look at Best Buy's prospects with this strategy.
There's a reason for all those vacancies
Two reasons Best Buy is taking this step are the cheap rent and abundance of vacancies. But those are also two major reasons the strategy is most likely doomed. Rent is cheap because of a lack of demand from businesses wanting to operate from a strip mall. There aren't enough customers patronizing strip malls to let the merchants keep paying the rent. Don't expect the situation to improve just because a mini-Best Buy shows up.
Competition heats up
For Best Buy and RadioShack, the competition in consumer electronics is fierce, both online and from their bricks-and-mortar brethren. Best Buy remains the top seller of consumer electronics, but that's also one of the biggest growth items for Wal-Mart, Target, and Amazon -- and both Wal-Mart and Amazon are among the top five sellers of consumer electronics.
Current market trends suggest that Best Buy won't hold on to its perch. Not only are sales growth and earnings-per-share growth falling for Best Buy, but the analyst consensus is also that those figures will continue to decline in the future.
Quarterly Sales Growth
Quarterly EPS Growth
EPS Growth Next Year
EPS Growth Next 5 Years
Big stores, small stores, same problem
Best Buy just reported earnings that showed same-store sales falling for nine of the past 10 quarters. Comps continue to decline for RadioShack, too. Both companies face the same problem, and it has nothing to do with square footage. "Few people are going to be willing to pay $80 for a cable in-store when they know they can buy an equivalent product online for $5," warned Rakesh Agrawal, an analyst with consulting firm reDesign Mobile. That's why Best Buy's net income has been plunging.
And copying the RadioShack business model probably won't work, considering RadioShack's own net income has plummeted over the same period.
Both companies have watched their cash positions deteriorate as a result. Best Buy is barely profitable while RadioShack is losing money, and both are loaded with debt.
A best buy? Not for Fools.
Down almost 50% for 2012, Best Buy's share price is following RadioShack's trajectory. For the Foolish investor looking to profit from retail growth, Wal-Mart, Target, and Amazon offer everything that Best Buy doesn't in terms of expanding sales and EPS growth. Smaller stores just won't fix Best Buy's decreasing sales and revenues.
Just because Best Buy and RadioShack aren't profiting from the biggest paradigm shift in retail since mail order, that doesn't mean some companies aren't. Far from it, in fact/ You can read about the 3 Companies Ready to Rule Retail in our special report to profit from this trend. Uncovering these top picks is free today; just click here to read more.
The article Best Buy Tries to Become RadioShack. Will It Help? originally appeared on Fool.com.
Jonathan Yates has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Best Buy, and RadioShack and is short RadioShack. Motley Fool newsletter services recommend Amazon.com and Best Buy. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.