Best Buy Has Risen From The Ashes

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Just how many companies do you suppose Amazon has put out of business in their long and tawdry history of undercutting retailers?  It's a list that's far too long to go through in one sitting, but one name that seems to have narrowly escaped the cut is Best Buy, the entertainment technology company that has not just limped on in resignation but managed to compete on a fierce retail market for better market share.  Best Buy was thought to be a dud stock only a few years ago, the same time that archrival Circuit City went out of business due to an inability to match Amazon's bargain-basement prices and lack of physical stores.  Why has Best Buy bucked the trend?

What A Difference Three Years Make

Rewind back to 2012 and Best Buy had a plethora of problems on their corporate radar.  Stock prices (BBY on the NYSE, trading for $36.72 a share) absolutely collapsed from 2012 to 2013, dropping to less than half their value from January to December.  2013 proved to be the year of redemption as Best Buy triumphantly went from $11 per share to $43 per share...or so the company and their shareholders thought, only to find a rude awakening as a post-Christmas slump sent the stock tumbling back down to only $24 a share.  Why?  Several reasons, the Internet chief among them.  While Best Buy had over two billion dollars in online sales, it did so only due to over one billion online views, one of the worst conversion rates in the history of online sales.  This put their stock through a rollercoaster up until the situation where we sit today: Best Buy has admirably cut the fat on their business model, with sales growing by nearly four percent per year as online sales jump by over seventeen percent per year.  Yes, you read that correctly: Best Buy has managed to out-Amazon the Amazon competition.  They did so by creating the antithesis of the "showrooming" experience, in which a customer will investigate a product at a physical store before buying it online at a cheaper cost.  Best Buy ramped up a price-matching guarantee in order to recoup the valuable customers who prefer to window browse before they browse Windows, one that dropped their margin by about ten percent overall. 

Price Wars

Giving a price guarantee, however, doesn't guarantee that the price will be lowest.  To do that, Best Buy had to tackle their other nemesis, Wal-Mart.  Since it's all but impossible to undercut Wal-Mart, Best Buy had to perfect the economy of scale needed to get their products into the customer's attention span at the lowest possible cost.  A policy called "Renew Blue", undertaken by new company CEO Hubert Joly, shortened the supply lines and eliminated as many middlemen as a Fortune 500 company has to deal with.  One billion dollars of bloat and ineffective product pathways came out of the Best Buy budget, although Best Buy actually managed to hire more laborers by eliminating redundant layers of management from their corporate structure.  The company re-organized the 1000 stores to become miniature distribution centers, so that an online order can be more easily filled by the store employees even if any given store cannot handle a large volume of sales.  While this strategy had no shortage of risk -- each pathway from shipping center to customer front door increases the costs to the company -- it proved capable of increasing the supply available to each customer.  What's more, Best Buy actually managed to average faster delivery times to customers than Amazon did in 2014.  Finally, the Supreme Court decision that companies must pay sales tax even if they distribute to states without sales tax proved enough to knock Amazon off-balance, allowing Best Buy to reap the benefits. 

Going Forward

While many companies are experimenting with the digital marketplace, Best Buy has an advantage in that they can allow the customer to see, touch, and experience a product prior to pulling out their credit card.  That's a major advantage when the online shopping route offers no savings, which was previously the most important factor giving Amazon the inside edge.  Despite the fact that spending on consumer appliances is down through 2015, Best Buy has seen solid growth with consumer appliance sales accounting for a double-digit percentage of their overall sales.  Their approach to comprehensive and quality customer service, furthermore, makes them a favorite over Wal-Mart, who cuts out every dime available (most notably, training employees) and forces the customer to deal with the aftermath.

  • The Takeaway: while it's still hot outside, the holiday months are rapidly approaching.  The biggest retail stores may do as much as half their business in the last two months of the year, making investors ample money if they buy in early enough to cash in on the growth.  Best Buy is coming off 52-week lows in the month of July, indicating an excellent growth opportunity heading into the final months of the year.  Consider investing in the short term simply for their solid holiday gains, or over the long term since the company has found the answer to the puzzles that are plaguing much of their competition. 
  • Amazon and Wal-Mart stock have been trending downwards over the summer months.  It's likely they have a ways further to go this year: investors can capitalize on their holiday bumps as well, but should wait another 4-6 weeks for stock prices to drop further in order to get the most value out of their relatively inefficient business models.

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