Best Buy Thought It Could Escape Amazon but Couldn't

Retail

Published: May 25, 2018 6:35 am

Last Updated: January 11, 2020 11:10 pm

It has been a day since Best Buy Co. Inc. (NYSE: BBY) posted moderately poor results. They raised the specter of Amazon.com Inc.’s (NASDAQ: AMZN) relentless cannibalization of Best Buy, which some thought was slowing. They were wrong.

The story of how Amazon has destroyed and will destroy the brick-and-mortar retail industry is ancient now, but it continues to be repeated as retailer after retailer reports poor results. Some may go the way of Sears Holdings Corp. (NASDAQ: SHLD), parent of Sears and Kmart, toward inevitable bankruptcy. Best Buy is healthier and could hang on for decades. However, its e-commerce business is just too small to make a difference to the overall company.

Best Buy said its most recent quarter was better than expected, which means management had fairly low expectations beforehand. Revenue rose from $8.5 billion to $9.1 billion. However, operating income as a percentage of revenue dropped from 3.5% to 2.9%. The horrible news was this:

Domestic online revenue of $1.14 billion increased 12.0% on a comparable basis primarily due to higher average order values and higher conversion rates. As a percentage of total Domestic revenue, online revenue increased 70 basis points to 13.6% versus 12.9% last year.

Not even a glimmer that online sales will ever approach those in stores, which is what’s needed to keep viability long term.

Best Buy has had some periods during which its stock rallied in recent years. That is over now. Its shares are up less than 3% this year, while Amazon’s are higher by 34%.

There was a time when Best Buy management worried about “showrooming.” People would look at merchandise at Best Buy and then shop for price, often buying the items on Amazon. That process probably never lessened. In the long term, Best Buy will disappear as a pillar of consumer electronics. It is only left to consider how long that might take.

Best Buy’s description of itself:

We at Best Buy work hard every day to enrich the lives of consumers through technology, whether they come to us online, visit our stores or invite us into their homes. We do this by solving technology problems and addressing key human needs across a range of areas, including entertainment, productivity, communication, food, security and health.

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