Best Buy's Still Broken


Best Buy's shares soared 16% on Friday, but don't make Mr. Market's mistake.

There was nothing in the fading retailer's holiday sales report to get excited about. It could've been worse? Yes, but the point is that it did get worse. There's also a widely misreported nugget that Best Buy's actual store-level performance was flat during the telltale nine-week period of November and December.

Let's break down this problematic missive that misguided investors were buying into on Friday.

  • Best Buy's reporting flat domestic comps for the holiday period, but the chain bakes in sales into the mix. Now, Best Buy isn't the only retailer to take website sales, divide it by the number of stores, and pad its comps this way. However, since we know that Best Buy's online sales grew by $0.1 billion to $1.1 billion of the $9.9 billion, we can pretty safely say that the bank of registers at the average store actually saw a 1% decline.

  • Best Buy's online sales growth of 10% was a rare morsel of positive news in Friday's report, but this only means it continues to lose market share to . The leading e-tailer hasn't offered up explicit holiday sales results, but analysts think will have increased its holiday sales by 28%.

  • Things only get worse overseas for Best Buy. Yum! Brands took a hit on Tuesday after warning that comps in China would take a 6% hit. This is devastating news, because Yum! counts on the success of its KFC chain in the world's most populous nation to drive a substantial chunk of its business. Best Buy's international operations -- largely the roughly 200 Five Star Appliance stores it runs in China -- saw a 6.4% slide in comps. That's worse than Yum!'s drop.

Schulze is a misunderstood savior
In late November, Best Buy was targeting $850 million to $1.05 billion in fiscal year 2013 free cash flow. Now, less than two months later, that figure has been whittled down to $500 million for the year ending in three weeks. This figure excludes one-time restructuring hits and includes an expected benefit from a change in restricted cash related to working capital, so things are even worse than the numbers suggest.


Some have argued that spurned founder Richard Schulze will come back to rescue public stakeholders with a buyout bid at a reasonable premium. A Minneapolis Star Tribune story last month reported that he was working on a deal to take his company private for $5 billion to $6 billion. That's not only roughly half his original $11 billion price tag, but it's also less than the $6.5 billion enterprise value that Best Buy is packing after Friday's rally.

There's nothing in this report that should force him to act quickly. Waiting longer will only make it cheaper to acquire Best Buy. There's nothing in Friday's numbers to suggest that there will be a bidding war or a need to pay up for the disintegrating giant that continues to follow in Circuit City's footsteps to the graveyard.

No shorts, no service
A big mantra at Best Buy over the past couple of years has been to boost services. Attaching high-margin service contracts to low-margin sales will help increase performance.

But that strategy has been a flop. The hard sell has turned off customers, giving them another reason to sidestep the aggressive pushers of extended warranties and the ridiculous buyback protection program in favor of online shopping.

Since Best Buy has been investing in training employees to push these plans, one would expect at least this to be a rare bright spot -- but it's not. Services revenue declined 3.1% during the holiday period, and that was after a 3.4% slide a year earlier.

The ghost of Christmas Future
The only thing uglier than Best Buy this past holiday season is a glimpse of what it will be like in the future. After turning heads in October by agreeing to price-match Amazon during the seasonally potent holiday shopping season -- a move that must've crushed margins -- will Best Buy have to make this a year-round policy?

Target announced on Tuesday that it will match Amazon's prices all year long. The bar has been raised on lower margins, and others will have to follow suit.

Target can do this. It sells a ton of fresh groceries and strikes deals with celebrities and designers for one-of-a-kind apparel and decor items that one can only buy at Target. There are no prices to match on those fronts. What does Best Buy have that's exclusive? Don't expect to be taken seriously if "Insignia" commoditized electronics is your only response.

Best Buy's report on Friday was just the next step down in a story that won't end pretty. Don't let the market's exhale convince you otherwise.

Want a less bearish perspective?
The bricks-and-mortar-versus-e-commerce battle wages on, with Best Buy caught in the middle. After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. How will the new leadership perform? Will old leadership take the company private? Will a smaller store format work out for both the company and its brave investors? Should you be one such brave investor? To help answer all these questions, The Motley Fool has released a new premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report by today.

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Longtime Fool contributor Rick Aristotle Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of 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.

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