You're Missing the Point, Best Buy
Mar 29th 2012 12:05PM
Updated Mar 29th 2012 12:06PM
Shares of Best Buy (NYS: BBY) were initially indicated to open higher this morning, despite announcing a sharper-than-expected drop in sales during the telltale holiday quarter and revealing cost-cutting plans that include shuttering 50 stores and hundreds of layoffs at the corporate and support levels.
However, somewhere in the hour leading up to the market's opening bell, reality sank in. A step back isn't the first step before taking a giant step forward -- at least not in retail.
Best Buy's stock opened 5% lower, and rightfully so.
We've seen this backpedaling before:
- Circuit City announced that it would be closing 155 of its stores in November 2008. A few months later the entire chain was being liquidated.
- Borders went public with plans to shutter 200 of its bookstores in February 2011. Like Circuit City, a few months later the entire chain was being liquidated.
- Movie Gallery shut down 520 of its 4,500 video rental stores in 2007. A couple of years later, the entire chain was being axed.
Now, it's fair to argue that Circuit City and Borders were already in bankruptcy protection at that point. Best Buy is a very profitable company at the moment, and its near-term liquidity is not even an issue.
However, every chain has that moment when it realizes that its relevancy is gone. The first move is to close unprofitable or underperforming stores until it gradually owns up to the reality that it's the concept -- and not just select locations -- that is the problem.
Quick. Tell me one retail establishment that has closed at least 50 stores and has returned to glory.
They're rare -- but they're out there.
Pier 1 Imports (NYS: PIR) revealed three years ago that it would be closing as many as 125 stores. It was a dark time for the home furnishings chain. Its stock was trading for as little as $0.10 a speculative stub. Pier 1 bounced back. Its three-year cumulative comps have soared 30.9% as of its latest quarter. The stock's been a 180-bagger since bottoming out!
We can't forget Starbucks (NAS: SBUX) . A year before Pier 1 closed dozens of stores, the baron of baristas moved to close 600 of its European-styled brew shops. We all know that Starbucks bounced back. It's bigger and better than ever these days.
Why can't Best Buy be the next Pier 1 or Starbucks? Well, let's start with the timing. Starbucks and Pier 1 announced their store closures in 2008 and 2009, respectively. Remember that time? We were in the darkest stretches of the recession. The economy's bouncing back these days. Unemployment's dropping. Consumer confidence is on the upswing. If a chain is cutting loose some of its stores now -- when the retailing outlook is far more upbeat than what's showing in the rearview mirror -- run.
Can a bad retailer in retreat be a good near-term investment? Absolutely. Look at Sears Holdings (NAS: SHLD) . The shares have more than doubled this year, even though the parent company of Sears and Kmart is closing down stores, unloading smaller concepts, and fading after years of negative store-level comps.
Best Buy doesn't believe it's retreating, despite the layoffs and closures.
"Best Buy's retail store strategy is to increase points of presence, while decreasing overall square footage," reads the press release.
It's closing superstores, but it will be opening twice as many smaller mobile-specialty stores than it closes. It's also tweaking the concept itself, and that's a plus. Unfortunately, Best Buy is essentially saying that when it grows up, it really, really wants to be RadioShack (NYS: RSH) . Anyone that caught the small-box specialist's disastrous holiday quarter -- where margins got crushed as the emphasis shifted from consumer electronics to mobile -- isn't going to like that vocational switch.
However, there is one line in this morning's falsely optimistic earnings release that should send shivers down the spine of the fine employees donning blue polo shirts and khakis on the way to work this morning. Disillusioned Best Buy shoppers, you're not going to want to read this.
"The company plans to introduce a new store labor model to be implemented in all of its U.S. big box stores before the 2012 holiday season that will provide increased store employee training and a new enhanced compensation plan that introduces financial incentives for delivering on customer service and business goals," reads the release.
In other words, if you were always dubious about why an employee was favoring one product over another or turned off by the hard sell of insurance programs and services on the way out, get ready for the hard sell. It's far easier to measure "business goals" than "customer service."
Best Buy's about to become a used car lot.
Best Buy is not a good buy
I entered a bearish CAPScall on Best Buy in Motley Fool CAPS three months ago. The call is beating the market so far, because Best Buy is not. If you want to play nice with the trends that will pay off in the future, forget Best Buy and begin reading up on the stocks that smart investors are buying. It's a free report, but it will only be available for a limited time, so check it out now.
At the time this article was published The Motley Fool owns shares of RadioShack, Starbucks, and Best Buy. Motley Fool newsletter services have recommended buying shares of and writing covered calls on Starbucks. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.