John Akerson's Thoughts

Business, technology and life

Best Buy

Best Buy stock plummetted 15% yesterday.  The headlines were all about “Q3 Profit Misses, Outlook Slashed” but I think the real story goes way deeper. source: Yahoo Finance

If you look at the numbers – their Q3 net income was $217m (54c/share) compared to $227m (53c/share) in the same quarter during the previous year.  The previous year was one of the most difficult years in US business history. Their stock dropped like a rock, from about $41.70/share, to about $34.50/share.

Seeking Alpha thinks Best Buy is being “unduly punished by Short Term Factors” and they might be correct, but I think their stock price reflects risks.

If you just look at numbers and projections, the stock IS undervalued in the 9.5x P/E ratio/ $34-35 range where it is at.  

The stock is undervalued in the 9.5x P/E ratio/ $34-35 range where it is at – if one only considers the numbers. It is extremely significant that their net income dropped between these particular quarters in these particular years. The economic climate was so much worse last year. There should have been growth. Best Buy’s net income drop goes deeper than the appraisal of delivering products to/for customers that weren’t there. Best Buy’s customer service issues are significant and not necessarily related to how many people are on their floors.

Their marketing dept would probably pick a generic version of me as their perfect customer: An employed geek with a couple of thousand followers who knows the difference between 60hz and 240hz, the difference between i3 and i7, the difference between wireless g and n, and is extremely impressed by the performance gains delivered by SSD as compared to 7200 rpm.  

My very personal and admittedly anecdotal experience is that their service is so horrid – that their prices, selection and availability just don’t matter.  I should be their customer, but I am not. When a business loses its target-customer base, drops in net income are a predictable result.  Facebook shows such a negative reaction to Best Buy – and Victoria Barret pointed out on Forbes that YouTube and Netflix are competitive problems as well. She thought their competitive advantages were around viewing patterns.  Netflix and YouTube excel in customer service, and I think that it will be essential for Best Buy to master the customer service components.

Bernhard Warner (Social Media Influence) looks at Best Buy’s social media efforts and distills their issues: 

“we get news that Best Buy is finding it difficult to compete with the likes of Walmart and Amazon. com who seem to be doing a better job of discounting and delivering a more satisfying customer experience. In the retail business, mastering those two parts of the business and you usually finish with a strong quarter. Only after that should you focus on new apps.”

Best Buy’s stock might certainly be a bargain, but the current price figures in the risks of their complex competitive  landscape and whether Best Buy can recover, or if they are on the Circuit-City path.

December 16th, 2010 Posted by | Business, Competitive Advantage | no comments