Best Buy Gets Run Over By A Reindeer

By Stephen D. Simpson, CFA | December 26, 2011 AAA

For a company that finds itself needing to validate its big-box model and avoid going to the same elephant graveyard as Borders and Circuit City, Best Buy (NYSE:BBY) has certainly stepped in it again, and this time right before Christmas. Several news outlets, including the Wall Street Journal and PCMagazine, are reporting that Best Buy has been unable to fulfill online orders made in the weeks following Black Friday and has instead canceled these orders.

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Too Popular for its Own Good?
Unfortunately, Best Buy has said almost nothing publicly on this issue apart from an emailed statement to a FOX affiliate in Minneapolis, but from what information is out there, it seems that unexpectedly high demand and supplier shortages have led the company to cancel online orders made in the past few weeks. Looking through message boards and online forums at both Best Buy and shopping websites suggests that it's not a complete disaster and largely limited to items like the Sony (NYSE:SNE) PlayStation and Fujifilm AX-350 camera. Even still, Best Buy was hardly proactive about this and it looks like there are going to be some supremely irritated and newly-former Best Buy shoppers this holiday season. (For related reading, see The 4 Rs Of Investing In Retail.)

How Could This Happen?
If there's any irony to this, it may be in that Best Buy was supposed to be making a big push to improve its online shopping business this season. After all, the company is under pretty serious pressure from Amazon (Nasdaq:AMZN), as well as Wal-Mart (NYSE:WMT) and Costco (Nasdaq:COST) both on the ground and on the internet.

Moreover, it's not like there weren't hints that supply could become an issue. Look at the reports from chip companies like Texas Instrments (NYSE:TXN), Micron (NYSE:MU) and Microchip (Nasdaq:MCHP) from the summer onwards - major consumer electronics manufacturers were cutting orders and running down inventories. It's not so hard to see how that could have been a set-up to run out if demand ran hotter than expected.

A Mortal Wound or a Papercut?
If there's good news in this, it is in the presumption that this is a very limited issue. Clearly it hasn't reached the level where Best Buy feels the need to do a major public mea culpa. In fact, were it not for the way information (and disgruntlement) spreads on the internet today, this issue may not have even gotten any attention.

Assuming that this isn't a more widespread problem, it is unlikely to really change the trajectory of this company. Fact is, companies like Best Buy and Gamestop (NYSE:GME) are in a tough position, trying to validate a higher-cost store-based model in a world that is increasingly happy to steer away from stores and go for the bigger online discounts.

Where this becomes a bigger problem is in the overall analysis of Best Buy as a turnaround story. I have been tempted to consider these shares more than a few times in the past year, thinking that the valuation was low enough to merit a gamble on the turnaround prospects. If this is a sign of mistakes to come, though, that entire thesis falls. Best Buy can no longer afford to screw up - the customers that are still willing to shop with them are too precious and the stakes too high. There's still room for Best Buy to preserve its big box model, but a successful online and inventory management strategy has to be front and center in its priorities. (Find out which catalysts can turn struggling stocks around to create a tidy profit. For more, see Turnaround Stocks: U-Turn To High Returns.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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