Best Buy Thinks Small

By Sham Gad | April 03, 2012 AAA

Best Buy (NYSE:BBY), the largest standalone big-box retailer of electronics, has concluded that size matters. Specifically, Best Buy is starting to think small. In the electronics industry, size appears to have its disadvantages.

Disappointing Quarter
Last week, Best Buy announced that it will close 50 of its big-box locations. The stores, some as large as 58,000, are no longer profitable, given the shift in electronics sales. The news of the store closings came along with a disappointing quarterly report. During the last quarter, Best Buy reported a loss of $1.7 billion, compared with a profit of $650 million in the year ago period. Shares have declined by over 10% since the news of the quarterly loss. The share price drop was likely mitigated by news that the company was shuttering the doors on 50 stores, along with plans to reduce headcount by 400 employees, as part of a broad effort to shed $800 million in costs. That news prompted some analysts to upgrade Best Buy shares in anticipation of the future.

SEE: Is Online Shopping Killing Brick-And-Mortar?

A Different Future
Best Buy's loss has been a gain for the likes of Amazon.com (Nasdaq:AMZN). More and more consumers visit Best Buy to examine the products, only to turn around and purchase the items online at significantly lower prices. Online retailers like Amazon can offer lower prices, because they don't have to pay and maintain physical retail locations. Best Buy's terrible quarter verified that trend.

SEE: Why You Should Care About An Internet Sales Tax.

The Bottom Line
Going forward, the company will open significantly smaller stores that will focus on selling items like mobile phones. Apple's (Nasdaq:AAPL) retail stores are experiencing significant growth and profitability. Little retail space is required to display smartphones, tablet computers and many of today's popular electronics. Yet these items tend to sell for as much, if not more than large items, such as flat screen televisions. That industry shift, along with competition from the likes of Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), has put Best Buy in the position it's in today. However, if the company can execute on its plan of eliminating larger, more expensive stores and focus on small stores selling items like smartphones, the company may yet have another chance to rescue its business.

SEE: Comparing Online and In-Store Prices.

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

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