5 Reasons Best Buy Stockholders Should Dread Thursday

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5 Reasons Best Buy Stockholders Should Dread Thursday The holidays may have come and gone, but Best Buy (BBY) is going to very publicly relive the season of shopping this week -- whether it wants to or not.

The electronics giant is one of the last retailers to post its quarterly results for the period that included the holiday season. Wall Street analysts are generally optimistic about Thursday's release: They see Best Buy's revenue climbing 6% to $17.2 billion during the fiscal fourth quarter with earnings inching 9% higher to $2.16 a share.

In retail land, such numbers aren't all that impressive. (We're talking about the shop-till-you-drop season, after all.) But after a year of sluggish sales and profitability going the wrong way, the consumer electronics retailer will take it.

Well, it would take it if that's the way things play out. But there are more than a few reasons for the retailer (and investors) to worry.

1. Wall Street has been very wrong about Best Buy's prospects lately

It's now been more than six months since I argued that Best Buy will never be great again, and the company's financials continue to bear that out.

If those analyst targets mentioned earlier seem somewhat appetizing, consider that Best Buy has actually missed Wall Street's bottom-line estimates in each of the two previous quarters. Badly. Until analysts catch up -- or down -- to the Best Buy reality, the smart money's on the pessimist.

2. The retailer ruined the holidays for a lot of shoppers

Nobody wants to play The Grinch during Christmastime, but that's exactly what Best Buy did this past quarter.

"Due to overwhelming demand of hot product offerings on BestBuy.com during the November and December time period, we have encountered a situation that has affected redemption of some of our customers' online orders," read the chain's email statement to its local Fox 9 television station. "We are very sorry for the inconvenience this has caused and we have notified the affected customers."

This wasn't just a retailer that made pricing promises that its inventory couldn't keep dating as far back as Black Friday. Best Buy waited until just days before Christmas to let its online customers know that they would have to scramble for last-minute replacement gifts.

If the outright cancellation of long-standing orders wasn't bad enough, a scathing Forbes article came out the week after Christmas, blasting the retailer's in-store experience. Forbes contributor Larry Downes -- arguing that Best Buy is going out business, gradually -- took the company to task for its cascading margins, aggressive up-selling tactics of its employees, and archaic return policies.

CEO Brian Dunn responded publicly on the Best Buy blog, but that only resulted in many of Best Buy's own hires -- or at least folks who identified themselves as store-level employees -- agreeing with the frustration of having to sell unpopular insurance and protection services on top of what is already overpriced wares relative to what savvy shoppers are finding online.

3. Best Buy is beholden to Apple release dates

For better or worse, this has become Apple's (AAPL) world. Consumer electronics retailers live and die by Apple releases. Even the likelihood of Apple introducing a full-blown high-def smart TV later this year is likely stifling traditional flat-screen sales.

Best Buy has been an early distributor of Apple products, and that has certainly helped the retailer. However, Apple hardware is now showing up across a growing number of retailers, directly through Apple, and now all three of the country's largest wireless carriers.

However, the one thing to remember here is that Best Buy's fiscal quarter began on Nov. 27 and it ends in late February. How many new products did Apple release in that time frame? The iPhone 4S hit retailers in early October. The new iPad wasn't rolled out until earlier this month. Obviously, Apple products are big sellers, especially during the holiday season, but this may not be the most opportunistic holiday quarter for Best Buy given Apple's timing.

4. RadioShack's crummy holiday has foreshadowed Best Buy's results

Small-box juggernaut RadioShack (RSH) works on an entirely different fiscal calendar. Its holiday quarter ends at the end of December.

How were the holidays for RadioShack? Not pretty. Net sales may have inched 6% higher, but profitability and margins got crushed. Smartphone sales were strong, but margins were terrible. There was a nearly 30% plunge in traditional consumer electronics, consisting of the digital music players, digital cameras, and GPS products that Best Buy and RadioShack had been feasting on in the past.

Best Buy should hold up far better than RadioShack did on the bottom line, but if Best Buy comes up short, even a small-box competitor was warning you that it could happen.

5. Broader trends continue to work against Best Buy

One of Best Buy's bright spots during its fiscal third quarter was its robust 20% growth in online sales. What Best Buy investors were never told was that larger e-tailer Amazon.com (AMZN) is growing more than twice as fast.

The "showrooming" trend -- where shoppers hit local stores to check out products that they want to buy before snapping them up for less online -- is for real. BestBuy.com prices, just like Best Buy prices, more often than not just can't compete with the lean overhead of pure dot-com merchants.

Now that BestBuy.com's reputation got roughed up after the December order cancellations, it will be even harder for the meandering retailer's website to win back Black Friday shoppers later this year.

Digital distribution is another dagger. All of that space that Best Buy is devoting to CDs, DVDs, books, and video games are being replaced by media publishers reaching out directly to end users with that same content in downloadable form.

Given all that Best Buy has been through and what it will likely go through in the future, it's hard to get excited about Thursday morning's report. It's time to get petrified, shareholders.

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, Apple, Best Buy, and RadioShack. Motley Fool newsletter services have recommended buying shares of Amazon.com and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple.



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