Best Buy's Offerings Look Too Much Like Amazon's

(Bloomberg Opinion) -- There were no signs of a rebound in Best Buy Co.'s latest financial results. While the company is painting a hopeful picture for the longer term, prospects for the core retail business and new at-home services remain lackluster. Investors could be forgiven for wondering whether some problems are too hard to fix.

Early Thursday, the consumer-electronics retailer reported weaker-than-expected revenue for the three months ended in January. Comparable store sales fell by 2.3% from the same period last year and came in below analysts' median estimate. Best Buy's outlook for this year wasn't any better, with the company predicting another drop in sales. Management vowed that the numbers will improve in a couple of years. After initially falling, the stock climbed 9% Thursday morning.

Don't read too much into the early stock reaction. Best Buy's shares have fallen 27% since the company's last earnings report three months ago. Like other brick-and-mortar retailers, the company has been trying to modernize its business by shifting toward e-commerce sales and rolling out a subscription-based customer support service. But Best Buy has unique challenges that are difficult to overcome.

Industry experts say the main differentiator for merchandising success is product curation. But unlike apparel or furniture, the consumer electronics category is fairly commoditized. According to Best Buy filings, about 60% of its revenue come from products made by just five companies – Apple Inc., Samsung, HP Inc., LG and Sony Group Corp. Consumers can find the same lineup of major brands on sites like Amazon.com, so there is no compelling reason for them to shop at Best Buy.

Physical retail has other inherent disadvantages compared with online shopping, including smaller in-store inventory, less selection and high real estate costs. It's no wonder Best Buy has been steadily shrinking its store footprint from roughly 1,800 stores in 2014 to about 1,100 today.

Best Buy has been trying to build up its e-commerce business. But its online unit has been sputtering in recent quarters. The pandemic pulled forward a significant amount of demand last year as the public built out their home entertainment and remote-work setups. That means it will be years before consumers need to replace their webcams and upgrade their computing devices. Best Buy's third-largest product category, appliances, faces another challenge. With the Federal Reserve expected to raise interest rates, home sales could slow, crimping appliance sales.

Then there are services. To much fanfare, Best Buy launched its Totaltech subscription service last October. The company expects it will be a key driver of sales in a couple of years. The service costs $200 per year for a variety of benefits, including unlimited home tech support, special discounts and installation of certain products. But banking on consumers to renew a relatively pricey membership program for multiple years seems iffy. How often does the average consumer need a television or a doorbell installed? Probably not every year.

Of course, investors might be tempted by Best Buy's valuation. The retailer's stock is trading at a seemingly attractive 11 times the next four quarters' earnings estimates, which is a 20% discount to its five-year historical average. But the retailer's revenue is expected to decline this year, and valuation multiples tend to stay low unless there are signs of sustainable growth.

Frankly, that doesn't seem possible as long as Best Buy's new initiatives fail to take off, online sales stay weak and overall revenue remains challenged. At its heart, Best Buy is still a shrinking physical retailer with all the problems facing that sector.

Sometimes cheap stocks are cheap for good reason.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tae Kim is a Bloomberg Opinion columnist covering technology. He previously covered technology for Barron's, following an earlier career as an equity analyst.