Best Buy shares have been on a steep upward trajectory this year, but much of the price appreciation has seemed predicated on hope. Now, the electronics retailer's latest quarterly results have tempted loyalists into thinking the turnaround is under way. There are a few major cases against the bull case, and "sales" are just the tip of the iceberg.
There's no doubt that Best Buy's return to quarterly profitability is a welcome change from its previous losses. The retailer cut $65 million in annual spending during the quarter. Of course, companies must keep costs down, or even cut them when times are tough. However, the trick is cutting them in the right ways. Otherwise, these decisions may come back to haunt the company. Such cost-cutting might look good now, but if it isn't implemented in a smart way over the long term, it could drag down true innovation, and possibly hurt the workforce or cause a drop in overall business quality.
More immediately, for all that the profitable quarter further jazzed bullish investors, Best Buy's sales are still a long way from healthy growth. Best Buy's same-store sales fell 0.6%, and net sales fell by 0.4% to $9.3 billion. The company's sales haven't risen for more than a year.
Many investors are also excited about some freshening changes coming to Best Buy's sales floors, such as its "stores-within-stores" plan with Microsoft. However, management admitted in the conference call that such plans will be big undertakings, and these Windows hubs will be disruptive to the stores as they stand. These hubs will switch around the stores' computer departments, and it's not difficult to see why that might not be a seamless transformation easily conducted overnight.
Meanwhile, given the fact that the Microsoft brand wasn't exactly missing from Best Buy before -- and Microsoft just doesn't have the exciting appeal of other tech names -- it's difficult to figure out why investors are incredibly bullish on that particular strategy to begin with.
It's the consumer, stupid
Even beyond Best Buy's strategies, there's another big reason investors' current euphoria about Best Buy is misplaced. Many American consumers are struggling, and the competitive climate is an extremely important part of the current equation.
Last week's results from Wal-Mart and Target should sober people up; the retail sector's facing major challenges right now. Both major discounters pointed to sobering signs of consumer weakness, giving lackluster views for the rest of 2013. They described struggling shoppers who are grappling with costs for core essentials like food and gas. Given the time frame, those retailers aren't feeling too optimistic about the all-important fourth quarter (the holiday season).
That doesn't exactly sound like a good environment for Best Buy, which relies on discretionary spending on the hottest electronics and gadgets.
And you'd better believe Wal-Mart, Target, and their ilk are going to be courting consumers with aggressive pricing in the coming months, particularly on the types of big-ticket items Best Buy also sells. Last week, Wal-Mart readied its holiday layaway program, announcing that it will waive the $5 fee it previously charged to participate.
Right now, Best Buy's continued rally implies its fans aren't even factoring in the macro environment right now, nor the fact that competitors are going to be in yet another cutthroat battle for consumers' dollars.
Those who have ridden Best Buy shares to recent highs on the "hope play" may want to consider getting out while the getting's good. Best Buy's challenges are by no means behind it. And given tidings from some of retail's most important "barometer" companies, we're entering into a severely trying period.
Best Buy's just a bad idea right now.
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The article Buying Best Buy Now Is a Terrible Idea originally appeared on Fool.com.
Alyce Lomax has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. 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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