Not Buying Best Buy

Best Buy’s CEO Brian Dunn did a courageous and proper thing for shareholders by resigning.  He was not the right person to lead Best Buy into battle against online-only competitors that use Best Buy’s spacious and beautiful stores as the showroom for their products. 

Best Buy

Best Buy’s CEO Brian Dunn did a courageous and proper thing for shareholders by resigning.  He was not the right person to lead Best Buy into battle against online-only competitors that use Best Buy’s spacious and beautiful stores as the showroom for their products.  To make things even worse, smart cell phones make comparison shopping so much easier nowadays, and structurally, Best Buy cannot have lower prices than its online competitors.  Its stores also lack the breadth of selection of Amazon and they are at a permanent, competitive cost disadvantage.  The new strategy Dunn announced a few weeks ago of closing big stores and opening a lot of smaller stores for mobile sales makes little sense.  It is basically morphing Best Buy into a Radio Shack.  It would be great if this strategy had worked for Radio Shack, but it didn’t.  Radio Shack’s margins are collapsing, and that is why its stock is scratching as-far-as-my-chart-goes-back lows.

I don’t know what the solution is for Best Buy.  It must involve a much tighter collaboration of physical stores and its internet presence – the stores need to be turned from a liability into an asset.  Or maybe a logistical miracle that would allow Best Buy to deliver a much, much greater range of products (like, hundreds of thousands) to its customers on the day they order them.  One thing is for certain: the new strategy will require thinking that cannot be delivered by somebody who spent 28 years in the Best Buy box.  It requires a Netflix or Amazon-like strategy, where management was willing to bring forward (and flawlessly execute) a disruptive strategy that undermines its current cash cowing business.  Amazon did this by bringing electronic readers to the masses, which undermined its core book business.  Netflix did it with streaming.  I am sure I’ll get plenty of dissenting emails about Netflix: “We don’t know if its model will be successful down the road,” etc.  I’ll admit, I don’t know what Netflix’s streaming business is worth.  But one thing is for certain, if it did not bring out streaming it would have been dead in three to five years.  Now it has a fighting chance to survive and maybe even create value for shareholders.

I am a value investor, and so when I see a stock dangling at six times earnings I’d be lying if I told you that I did not have an inkling to seriously consider it for our portfolios.  But Best Buy is not a retailer that missed a fad (stacked the shelves with wrong-color shirts, etc.) – those sorts of situations often present great buying opportunities, as the problems are easily fixed.  Best Buy is a retailer that so far has missed a structural change that may make its business obsolete.  It is only cheap if the “E” projected for next year will be there.  So far the market is betting that it won’t, and I have no insight that encourages me to disagree with the market.

Reminder: The VALUEx Vail conference is June 20-22 in Vail.  This is not your typical conference – think of it as the TED of value investing.  Though this is a not-for-profit event, I hope what you’ll learn from attending will generate profits for you.  You can find out more about VALUEx Vail here.

Please read the following important disclosure here.

Enjoyed this read?

Share it with someone who’d love it too!

New to investing?

Explore these valuable guides to get started.

Value Investing
Student
Curriculum

The 6
Commandments
of Value
Investing

Letter to
a Young
Investor

Related Articles

Current thoughts on Tesla (TSLA)

Current thoughts on Tesla

Tesla market value of $780 billion mostly reflects Elon's future dreams, not car sales. The reality? Only $100-180 billion tied to the actual vehicle business.
Europe Can’t Hide Behind America Anymore

Europe Can’t Hide Behind America Anymore

Americans have always outspent Europe on defense, but to be fair, we have a currency advantage. Our military might elevated our currency to reserve status.
Europe’s New Status: The Children’s Table (IMA Client Dinner 2025 Video)

IMA’s March 2025 Client Dinner Video

Once a year, my company, IMA, hosts a dinner for our clients. Most of them live outside of Denver—and many outside the U.S.—so this event gives us a rare and meaningful chance to meet face-to-face, often for the first time, and really get to know each other.
The Reputational Bankruptcy of the American Dollar

The Reputational Bankruptcy of the American Dollar

The US dollar will likely continue to get weaker, which is inflationary for the US. Let me start with some easily identifiable reasons.

Leave a Comment