Best Buy Needs to Close 200 Stores

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In 2012, Best Buy Co. Inc. (NYSE: BBY) posted sales of $50 billion and a net income of over $2.2 billion. Those numbers have dwindled to slightly under $40 billion and $1.4 billion. To power current revenue, Best Buy has 1,600 stores, which is far too many.

Best Buy continues to shrink and will shrink more, according to company management. In the most recent quarter, revenue dropped from $8.59 billion in the period a year ago, to $8.44 billion. Management’s assessment of the near term was grim:

Best Buy is providing the following Q2 FY17 financial guidance:

  • Enterprise revenue in the range of $8.35 to $8.45 billion, a decline of (2.1%) to (0.9%)
  • International revenue decline of (5%) to (10%)

Also:

  • Non-GAAP diluted EPS of $0.38 to $0.42 versus $0.49 last year

In other words, Best Buy continues to shrink.

As is the case for every retailer of any size in America, investors do not have to look far for the “disruption” that has slaughtered Best Buy. Amazon.com Inc. (NASDAQ: AMZN) continues to undermine the value of every enterprise in the industry. Presumably Best Buy did not trumpet its e-commerce because the number is barely 11% of sales.

The industry recently has been flooded with data that show large retailers have too many stores. The reasons are self-evident. The costs of brick-and-mortar stores are too great, unless a retailer is in the midst of a growth spurt.

Two factors should affect the store count decision. The first is that Best Buy does have some online revenue. As that increases from the $832 million it reached last quarter, stores become less financially attractive. Their margins compared to e-commerce are low, and falling.

The other factor is that any retailer with net income margins that are barely 2% has some large number of stores that cannot be profitable. With 1,600 stores and a tiny net income, that conclusion is inescapable. Recent store cuts at other major retailers support that argument.

How many stores does Best Buy need to close? About 200 would be 12%. If Best Buy revenue continues to contract, that may not be nearly enough.