Is There Any Value Left in Consumer Electronics?

It really has been a roller-coaster ride for Best Buy investors. The company was trading at over $40 a share earlier this year--now it's down 35% year to date and trading around $25. Was Best Buy just a victim of the weak holiday shopping season or are there bigger issues plaguing the company?

Is Best Buy still a turnaround?
In Best Buy's recent earnings announcement, comparable-store-sales fell 2% for the first quarter. However, things do not look to be improving going forward. Comp sales should be down in the low-single digits for both the second and third quarters. The news for this consumer electronics retailer gets even worse, as Sears Holdings' Eddie Lampert noted that the, "the biggest negative contributor to sales has been from our consumer electronics business at both Sears and Kmart."

Shares of Best Buy took investors on a ride upwards from $12 a share in 2012, driven by the company's cost cuts. It also made strides with becoming more competitive on pricing, but if the turnaround is going to continue, it will take time. Shares have fallen from their highs as investors begin to realize that Best Buy is a multi-year story, not a quarterly one.

It will also require a new strategy, including giving shoppers a reason to visit its stores. The problem with Best Buy is that it still relies heavily on its brick-and-mortar business. It has yet to grow into the omni-channel consumer electronics powerhouse that it had hoped.

In reality, the company might be in a slow downward spiral. Its revenue generating capabilities have declined over the past couple years, and the company has not made any meaningful investment in its e-commerce segment. Sales were just $42 billion last year, down from over $50 billion the previous two years.

The competition is fierce
No discussion of Best Buy is complete without mentioning . It is proving to be a powerhouse in the retail market. Its gross profit continues to grow despite its competitive pricing. Amazon's gross profit margin has gone from 22.4% in 2011 to 27.2% in 2013.

With gross profits on the rise, Amazon may well be able to sustain its aggressive pricing. The other big advantage for Amazon is its Prime customer base. Amazon had upwards of 20 million prime members as of earlier this year.

One of its top competitors, GameStop , also has a strong loyalty program. It launched its loyalty program in 2010, and at the end of 2013, it had over 25 million members. The company noted that over three-quarters of its sales are via loyalty shoppers. That allows it to have a more personal relationship with its customers and make relevant offerings and recommendations. Meanwhile, Best Buy has its My Best Buy loyalty program and a private label credit card that it can try to capitalize on.

How shares stack up
Shares of Best Buy are trading at a P/E that is below 10 based on next year's earnings estimates. It also trades at a P/E to growth (PEG) ratio of 0.8. By both measures, Best Buy seems to be a very appealing investment.

However, in looking at other consumer electronics retailers, it appears they all trade similarly. Conn's and GameStop both trade with a forward P/E of less than 10 and they both have PEG ratios of 0.8. In that context, it appears that Best Buy is not as cheap as it appears.

Bottom line
The days of easy cost cutting might be over for Best Buy, as it's now time to develop a new strategy for increasing sales. It has yet to figure out a way to compete with Amazon in the online marketplace, and its stores do not offer enough value to convince customers to visit them. For those looking to invest in the retail space, there are probably better buys than Best Buy.

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of and GameStop. 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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