From Best Buy To Worst Buy.

By the beginning of the 21st century, the consumer electronics giant Best Buy was rolling on all cylinders. The company was named Company of the Year by Forbes Magazine in 2004 and was listed on Fortune Magazines’ Most Admired Companies of 2006. However in the latter half of the decade, the company began to take a turn for the worse. After a strong year in 2013 where the stock rose 239%, the price of Best Buy’s stock as of Jan 16th has plummeted 28.2% to a share price of $26.99 after their holiday earnings report was released. If you take a look at their stock prices throughout this last week, you can see the severe drop off.

Personally, I thought I misread the chart but the drop off is that severe. Best Buy CEO Hubert Joly addressed the decline in a recent press release:

“When we entered the holiday season, we said that price competitiveness was table stakes and an intensely promotional holiday season is what unfolded. In both channels, the promotional intensity that began with Black Friday continued throughout the period, which led us and our competitors to answer one question – do we make the incremental investment necessary to be price competitive and defend our market share? For us, there was only one answer… it was imperative that we live up to our customer promises – and one of these promises is to offer our customers competitive prices. This investment in pricing did come with a higher-than-expected cost, and we now estimate our fourth quarter non-GAAP operating income rate will be 175 to 185 basis points lower than last year…our holiday revenues were negatively impacted by a number of factors, including: (1) the aggressive promotional activity in the retail industry during the holiday period, which we believe did not result in higher industry demand and had a deflationary impact on our revenue; (2) supply constraints for key products; (3) significant store traffic declines between “Power Week” and Christmas; and (4) a disappointing mobile phone market.”

How exactly did this steep decline come about? And what does this mean for future investing in the company?

The Promise of Competitive Pricing (And it’s Pitfalls)

As Joly pointed out in his press release, Best Buy was intent on offering their customers competitive prices during an intensely competitive holiday season. The company began initially to work on cutting costs and ensuring that store prices would match the sale prices on their website. To compete against their biggest rival Amazon, the company also promised to match the lowest price on Amazon for products that both companies were offering. According to CNBC analyst Gina Sanchez, Best Buy’s attempt to win the pricing competition with Amazon lowered their profit margins, which ultimately brought in less revenue.

Should You Buy Best Buy?

What do financial analysts think? The view of most experts on Best Buy is not nearly as optimistic as the forecast was for the company at the beginning of last year. It is expected that Best Buy stock will continue to decrease to around an $18 share price. The decreasing profit margins and the rising competition that is coming from Amazon, who unlike Best Buy is a not-for-profit cast an ominous forecast on the future stock price for Best Buy.

For the optimistic and hopeful readers, not everything about the holiday earnings report and precipitous decline is perceived as a bad omen. In the According to reports, Online sales rose up 23.5%, which is up from last year’s increase of 10%. Joly has assured the masses that over the long run the attempt to stay competitive in pricing. Being so low, Best Buy stock could be a long term stock to monitor. It wouldn’t be the first time that Best Buy stock rebounded from a drastic drop in the share price. The last time they rebounded? Last year after a 49% drop in stock prices from 2012. Maybe there’s hope for Best Buy yet, but one thing that’s for sure is that they’ll be monitored closely by investors.

 

What do you think about Best Buy’s stock problems? If this sort of story interests you, here’s another story on a stock going sour and be sure to join the discussion in the comments below as well as on SprinkleBit