If you run a retailer, Satchel Paige had some advice: don't look back -- something might be gaining on you.
No retailer forever holds the brass ring. Once upon a time, Sears Roebuck was tops. By 1905, the Sears Catalog was selling cars, stoves, and just about everything else. It had as long a run as a retailer can. But the "Big Box" era of Wal-Mart (WMT) knocked it into the consignment bin. WMT, too, became the one to beat -- then got beaten -- thanks to Amazon (AMZN). Even AMZN will slip someday.
Meanwhile, there's Best Buy (BBY), which is losing its relevance at the speed of texting. Once the place to buy all things electronic, the BBY near me looks like a loud but barren airplane hanger with gallows-like racks sporting a few lonely DVD's (remember those?) just for old time's sake. BBY has been functioning as a free, cavernous showroom for AMZN, where customers test-drive digital cameras and other gadgets, then scan the bar code and buy from AMZN for less. Not much of a business model.
BBY is fighting back, bringing Samsung stores in house and making other tweaks to their retail strategy. But the question remains: why would you buy something at BBY unless you need it now or want to kick the tires? Most electronics are easily bought elsewhere and online, and at a truly best buy.
There was a time when BBY trounced the other electronics bazaars. Crazy Eddie, Radio Shack, the Wiz, etc. all were short-circuited by BBY's service, snazzy stores and teeming selection. Founded in 1966 -- and one of Fortune's Most Admired Companies by 2006 -- BBY rode the tsunami in consumer electronics, doubling revenues in the five years to 2010. Then sales stagnated, with AMZN and Apple (AAPL) stealing market share SKU by SKU. With BBY's stock halved since then, is it time to buy?
When retailers lose their mojo, it's hard to recover. Reinventing a retail model is a parlous prospect. Witness what happened at JC Penney (JCP) when Ron Johnson tried to "transform" the tired peddler of schmattes and socks. By eliminating coupons and sales, he alienated the last loyal shoppers. Revenues nose-dived so precipitously, it looked like all 1,100 stores had gone on holiday for a month. Reinventing yourself is always dicey, but doing it out of whole cloth, and without testing, is akin to Russian roulette. The retail consumer is a queer combination of fickle and staid. They want new ways of buying old things, and new ways of buying new things, but they also want things just the way they were. In certain ways, a retailer is always a business model in decay, in need of innovation but too complacent to do it. Nothing is so hard a turnaround as a large fixed-cost store base looking for a reason to exist.
On the other hand, BBY is not doing things blithely. Samsung "stores within stores" are probably a decent idea, and not too far afield. Done with meticulous testing and with real heed to what shoppers actually want, it can help. But it won't save BBY from the gorgon's head of nasties that beset BBY: digitized distribution of media content, the decline of the PC, and online shopping.
So is BBY really a Best Buy or a better sell?
Turning to intrinsic value will answer that question. Trefis thinks BBY is worth $20.64 per share, well below the market price:
With Trefis already considering BBY overvalued, a check of their assumptions is in order. One key input is US Store Revenue per Square Foot. Trefis has factored in a gentle slope downward, to $700 by 2019. I think the trajectory could be still steeper and have modeled it (along with Int'l Rev per sq ft) downward. This in turn should compress domestic and overseas gross margins, which I've dragged below 22 percent to account for the negative effects of smaller scale. It should be noted that BBY has maintained gross margins in excess of 24 percent for each of the past 10 years, so 22 percent is quite a conservative haircut on prior results.
The result is a $15.56 value per share, well below the $23.19 market price. Suffice it to say, BBY looks expensive. Far from a best buy, it looks like a much, much better sell.
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