5 Reasons Best Buy Stockholders Should Dread Thursday

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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You can buy a pack of gum there and they try to sell you replacement insurance on it.

March 28 2012 at 2:52 PM Report abuse rate up rate down Reply

Best Buy is a horrible company, despite what fanboy llama.farm says. Their demise will be a celebrated as Blockbuster's was....they abuse their customers and think they are idiots. You can't wring customers for everything they are worth and think you'll be beloved. Much of their sucess in the last 10 years was due to housing bubble (HELOC) money being blown on 60" TV's, Home Entertainment Systems, and Home Appliance Upgrades. That money is gone and it aint coming back. Finally their middleman role is completely obsolete due to retailers like Amazon (with MUCH better return and buyer protection policies), as happened to travel agents once the internet came into it's own and people could search 20 flights at once from their living room. I love seeing a company like this die, it's evolution playing itself out naturally. I was sad when Circuit City died. When Best Buy dies, I'll dance a jig.

March 28 2012 at 1:59 PM Report abuse -2 rate up rate down Reply
1 reply to Schizlor's comment

Yeah I can't wait to see 185,000+ Americans out of work too *sarcasm*

March 28 2012 at 2:24 PM Report abuse rate up rate down Reply

Best Buy sucks,will never shop their again.I purchased a HP Notebook PC there in 2010 for about $650.00.A great laptop,thanks to HP not Best Buy.In 2011 (1 year later) it got infected with a virus,so I took it to Best Buy to their in house Geek Squad to have it cleaned out and made virus free.The GEEK wouldnt even look at it and told me I needed to buy a new one it wasnt worth repairing.I left Best Buy went across the street to Staples of all places and for $150.00 had the virus removed,the latest windows program upgrade installed and the Norton anti virus program installed along with all my data returned and backed up.To this day one year later my PC still works great and no problems.Hats off to Staples,Best Buy is nothing but a over glorified and over priced Walmart.Hope they all go broke.

March 28 2012 at 12:46 PM Report abuse rate up rate down Reply
1 reply to usterry69's comment

For $200, you could’ve gotten unlimited Geek Squad software service (including virus removals, software installs, operating system repairs) for a full year. And it’s applicable on up to 3 computers, even if they weren’t purchased at Best Buy. If you know anything about Best Buy or retail stores these days, there’s hardly any markup (if any at all) on core products like laptops and tv’s. They make WAY more money on services so it wouldn’t make sense why Geek Squad would’ve told you that, unless he was trying to save you money. The $200 plan for a year is half-price with the purchase of a new computer, so he might’ve been trying to just save you money. It’s not in his interests (or anyone’s at a Best Buy, for that matter) to try to sell you new product or tell you wrong information. No one works on commission so it wouldn’t do anything for them to tell you something that isn’t for your best interests.

Personally, I wouldn’t bring my computer anywhere near the Staples by my house. They’ve told customers that ANY program, even one from Windows 95, will work on Windows 7. And they tell customers that any old printer will work with Windows 7. Clearly their lack of experience will lead to poor customer experiences in the long term.

I’m not trying to say that you were wrong and Geek Squad was right in this case. I know not every store is the same and there are bad stores out there; that’s true with any big box retail chain. Just try to think of the other side. If you were calm and understanding (unlike the way you’re acting right now), then it’s on them that they didn’t get you the experience you deserved.

March 28 2012 at 1:10 PM Report abuse rate up rate down Reply

I remember when Circuit City was in business. I bought a GPS from them, and returned it the next day because one of their other stores had the GPS I was really looking for. They wanted to charge me a 35.00 restocking fee for returning an item. Never heard of such a thing before.

March 28 2012 at 12:42 PM Report abuse rate up rate down Reply
1 reply to cliffy934's comment

There's no restocking fees at any Best Buy anymore.

March 28 2012 at 1:10 PM Report abuse rate up rate down Reply

I don't see Best Buy going under any time soon. However, the fact that there are "good" stores means there are bad stores out there and those are the ones that are going to get the press coverage and create the public image for the company.

Best Buy must get much better at training its employees to understand their products and make the customer experience worth not shopping online. I find ignorance, apathy, and outright bad information more often than not when i talk with anyone in the store. I overhear customers being told things that will only create an angry customer when they get home and discover it is not true.

Managers must be better trained in employee management and interpersonal skills and not just focus on loss prevention in order to protect their paycheck. Yes, the skill level they have to deal with for employees today is low and the personal and work ethic needed for success is absent in some of them making the manager job that much more work. Yet, it can be done and Best Buy will have to find ways to get that training and ability into their managers.

Best Buy will continue on but the mantra across all levels must be "I must get better every day".
Finding how to get everyone to own that will be the key to success.

March 28 2012 at 11:27 AM Report abuse rate up rate down Reply
1 reply to John's comment

100% agree. Being arrogant and not listening to anyone (including their own employees) will get them nowhere except out of business. They're listening and trying to get better, it just takes time. Especially when you have low end workers with a lot of turnover (and 185,000 of them across the country).

March 28 2012 at 1:12 PM Report abuse rate up rate down Reply

I'm not surprised to see this at all - My most recent experiences at Best Buy have been horrible. Moving into a new house has its challenges, but purchasing kitchen appliances through Best Buy is one mistake I will not make again. The delivery dates were repeatedly incorrect, and because the install date had to be the day after the delivery date, it made for some major headaches. When things were finally straightened out, we realized that our dishwasher was dented, so we had to get a replacement, and try to reschedule everything all over again. On top of this, we had to deal with horrible customer service. We called to try to fix the incorrect ship and install dates, and replacement (many times) which resulted in either nothing being accomplished, or the CSR actually hanging up on us.

The silver lining was knowing that at least we had racked up in Reward Zone points ... but going to the store, I found out that nothing was logged in the Reward Zone account. After dealing with their "customer service" reps (I'm not sure the word "service" is very fitting for their employees) as well as the store owner a few times, nothing was ever changed or accomplished.

As for the post by llama.farm below - I would disagree that the culture at Best Buy is "alive and well." Unless of course by "culture" you're referring to poor customer service by employees who just stand around socializing, that will get annoyed if you actually ask them for something, let alone expect them to fulfill an order correctly.

I used to shop at Best Buy but this latest experience will prevent me from ever going there again.
So long Best Buy ....

March 28 2012 at 11:27 AM Report abuse rate up rate down Reply
1 reply to bkellz's comment

You should email Brian Dunn about this. That sounds pretty terrible and something that the store did wrong.

March 28 2012 at 1:12 PM Report abuse rate up rate down Reply

Most of my experiences with Best Buy have not been stellar by any stretch. They do have a fairly up-to-date inventory and pricing is competitive, but the people who work there are below par on product knowledge. Not too much better than Wal-Mart. As far as Radio Shack goes, I managed stores for them during the 80's and early 90's and they were always the "Little Orphan Annie" of electronics retailers. What most folks didn't know was that Radio Shack at that time had one of the best Manager pay plans in the business. I worked a store that did about $750K a year and made 10% of that number. Not too shabby for a guy with only a high school education. Profits were great and so were the benefits. Lately, the Shack has gone competitive and got rid of their parts business. Big mistake. We used to sell TONS of parts to school children for projects and sometimes even the schools themselves. People came in for all kinds of stuff for their cars, boats, trailers and flashlights. Lots of profit there. Too bad they chose a different path. I was told that the Shack got very close to declaring bankruptcy not long ago. Very sad for a company that at one time offered such a fine service to the community.

March 28 2012 at 10:35 AM Report abuse +1 rate up rate down Reply
1 reply to packard54's comment

If you stay the way you were for 20 years, you won't be around. That's what stores like Montgomery Ward did and they've all gone under. You have to provide what the customer needs, otherwise they have no reason to go to your store and they'll go elsewhere.

March 28 2012 at 1:14 PM Report abuse rate up rate down Reply

Right, instead of making 250 Billion like they did last year their only going to make 247 Billion this year.
Get out while you can ! Dump that stock NOW !

March 28 2012 at 9:01 AM Report abuse rate up rate down Reply

Look at the numbers instead of facts. Really? You're comparing Best Buy to...Radioshack??? And the 'disappointed' customers whose orders did not ship for Christmas was terrible, but not what I would call "a lot'". Much less than half a percent of all BBY online sales were affected by this.

Every blog is posting what they think Best Buy should do. Do they know how big Best Buy is? Don't you realize how much money Best Buy is planning to invest in it's future? Best Buy is doing a ton of things behind the scenes that you guys don't know about yet (and things that will make shoppers excited). Writing them off or telling them what YOU think they should do is premmature (but mostly immature).

Mostly, I commented to tell you to look at the numbers and NOT just the stock numbers. Stocks tell you how much a company is growing. Best Buy isn't growing because they're not opening up any more stores. If they announced 300 new stores opening this year, their stock would skyrocket, but they'd be out of business by the calendar year. They're already in every major market that makes sense for them, so now they're focusing on what they can do to make the most impact in those existing markets.

Remember Google after Android was out for a couple of years? Their stock dropped too, even though it was over $600 a share at one point. Best Buy will continue to be a player in the field of electronics, just not in the same ways as we've previously believed. Comparing Best Buy and Circuit City is childish. Do you know how many poor decisions Circuit CIty made before they closed for good? They had no capital to ride on through their drought. Best Buy has quite a bit. They made it through 2007, after all.

Clearly, you've never worked at a Best Buy before or even been in one (or a good one). Going off of anecdotal evidence and random stories is so ludicrous. The culture at Best Buy stores is alive and well. Sure, there are some stores that aren't as good as others and there's unhappy employees. That is at almost every business in the world.

Anyone can post something on a random blog looking at some stocks on Google.
Here's what I would say: Go into a store. Talk to the employees. Talk to the managers. Talk to the CEO. It takes a lot more work and courage to do the latter, but you might actually learn something for a change.

March 27 2012 at 7:25 PM Report abuse +2 rate up rate down Reply