Best Buy 2012Best Buy (Symbol: BBY) is currently trading for roughly $21 a share, but can its fundamentals support a market valuation of $7.12B? I would argue “No.” Best buy has a EPS of $-3.37 and I think it will get worse before it gets better. I will make my argument with one simple argument.

“What does Best Buy have that others do not?”
The first thing that comes to my mind is physical presence. The stores physically exists, so that I can go and buy items… right now. Best Buy shouldn’t be chasing the smart shoppers, but the impulsive ones. Best buy needs to be viewed by the average consumer as having a superior physical presence for electronics for people who simply cannot wait to buy that overpriced LCD TV. Best Buy doesn’t and shouldn’t compete on price. Odds are that Best Buy isn’t going to offer the best price on 90% of their inventory compared to an Amazon or Wal-Mart (although they try to match prices for about 5-10% of their inventory).

Let me segway from Best Buy to RadioShack’s business model. Charge $20 for an adapter that would cost $2-$3 shipped online. Why in the world would that business model work? Because I need it right now, not tomorrow or the day after. I can only think of a few times in my life I’ve gone into RadioShack, and it was out of complete desperation. For an adapter or component that I wouldn’t expect to find at Wal-Mart, but I could easily find on amazon for 80% less cost. RadioShack is selling convenience, not competitive prices. They prey on impulsive and reckless buyers to allow them to have higher margins on their sales. That is exactly what Best Buy is on a less extreme pricing scale.

So where that leave Best Buy for the future? Competing against the Wal-marts and Targets types of stores. Stores that have the same prices or better prices and also offer more convenience. This is a battle that I believe Best Buy will ultimately lose.

Yes Best Buy has begun selling cell phones and exploring alternative revenue streams (as any good business should), but I feel it is doomed to slowly die the death of a bloated “once been retailer.” I expect more stores to close and for more employees to sadly lose their jobs, in an attempt to turn the numbers around or at least hide the bleeding.

Where does Best Buy go from here? What does it explore? I simply cannot think of any viable ways for it turn around over the next 5-10 years, therefore I am short on Best Buy.

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