Why Not to Worry Much About Best Buy’s Recent Pullback

Investors and shoppers probably remember all the pre-obituaries the business press wrote not so many years ago for Best Buy (NYSE: BBY). The company seemed on course for a tombstone engraved with the words “Murdered by Amazon (NASDAQ: AMZN).” Yet today, it is thriving — though as host Mac Greer and senior analysts Andy Cross and Jason Moser note in this segment from MarketFoolery, it takes time and money to keep a good retailer in position to survive the e-commerce onslaught.

In their view, the market dinged Best Buy shares for the costs of investing in long-term strategy and improvements, which will impact margins, but will also give it the service and in-store experience to compete.

A full transcript follows the video.

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This video was recorded on Aug. 28, 2018.

Mac Greer: Guys, let’s keep the retail theme going. Let’s talk some Best Buy earnings. Shares down around 7% at the time of our taping. Some of the numbers that jumped out — slowing online sales growth and some concerns over the third quarter profit forecast. Andy, how should I feel about Best Buy?

Andy Cross: I think this is actually a very good story. The stock is up 20% this year. I think there’s a lot of good expectations put into Best Buy. They are making a lot of investments into what they’re calling their Best Buy 2020 strategy. That’s making investments into the stores, the way that people are shopping and the experience. They’re spending more and more resources on their experiences. How people are shopping both in their store, but also into things like their in-home advisor business. They’re making these investments. That’s showing up a little bit on the gross margin side. As they make these investments, Mac, I think sometimes, some analysts and investors maybe think it’s going to hurt a little bit of the profitability. But the fact the stock’s done so well, I think there was some steam today that was let out of the stock price. That’s why it’s showing a little bit of a hit today. But really, the investments they’re making are long-term investments that I think are actually going to be good for shareholders.

Jason Moser: Yeah, I think today’s sell-off notwithstanding, it’s important to step back and recognize how wrong, collectively, we all were in the studio just a few years back, in calling an early time of death for Best Buy. It was very challenged at the time. Amazon was coming on strong. We saw this e-commerce climate taking shape, and Best Buy was slow to react. But new leadership in Hubert Joly, he’s done a very good job in taking this company in a bit of a different direction, catering to consumers in that e-commerce environment. And clearly, the business itself is continuing to thrive.

Greer: You mentioned Amazon just then, Jason. I was one of those skeptics a few years ago with Best Buy. I thought it was essentially on its last leg. The stores, at least in my experience, the in-store experience has gotten a lot nicer —

Moser: It has.

Greer: — when I’ve been in there recently. But a few years ago, when we talked Best Buy, we always talked Amazon and that concept of showrooming, where you’d go into Best Buy and then you’d compare prices on your phone on Amazon. Is that still a big issue for Best Buy? Or do you think they found ways around that?

Moser: I think it’s something at least worth being concerned about. Now with that said, it’s also worth noting that Amazon and Best Buy are partnering up. They’ve got a new line of TVs they’re pushing out with the Alexa operating system.

Cross: That’s right, a smart TV that you can buy in both the Amazon Marketplace as well as Best Buy. Getting back to the services side. They are really trying to push their basic focus in areas in selling hardware, tech service, and what they’re calling managed service. I mentioned in-home advisors. They have 300 advisors now that will go into your house and help you with your technology set up. They’re going to push that to more than 400 by the end of this year. They’re also offering what they’re calling total tech support, which is a $200 per year annual membership that will help you solve all your tech needs. If your computer gets a virus, or you need to set up around your different systems online, your wifi, whatever it may be, total tech support.

As they spend more and more on both the hardware and the software and the services side, I think that’s really the growth opportunity for Best Buy. We saw the $800 million acquisition of GreatCall, which provides the connected health services and emergency services for elder consumers. They have 900,000 paying subscribers, generating $300 million in annual revenue. Best Buy is really making the investments into these services that are going to compliment the tech offerings and the product offerings they have in the store.

Greer: I noticed that you did not say Amazon. I’m going to take that as a good sign.

Cross: Yeah, I think so.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Andy Cross has no position in any of the stocks mentioned. Jason Moser has no position in any of the stocks mentioned. Mac Greer owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.

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