Best Buy (NYSE: BBY) Stock: More Trouble in 2014

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Looking at today's market, it's hard to believe Best Buy Co. Inc. (NYSE: BBY) stock soared 254% in 2013, landing it among the 10 best-performing stocks of 2013.

Today (Thursday), shares of the Richfield, Minn.-headquartered company plummeted some 33% following reports of disappointing holiday sales. It was the largest single-day percentage drop for the stock since Aug. 8, 2002.

BBY ended the day down 28.59%, or $10.74, to close at $26.83.

For the nine weeks ended Jan. 4 - aka the crucial holiday season, which can amount to up to 40% of annual sales - Best Buy's sales slipped 0.8% at stores, websites, and call centers open for at least 14 full months. Analysts had expected growth.

Best Buy's steep seasonal price cuts, aimed at getting shoppers into its roughly 1,105 big box stores, 100 mini mobile standalone stores, and clicking "buy" on its online site, actually worked to the company's disadvantage.

President and Chief Executive Officer Hubert Joly said in a statement that the deeply discounted holiday season, coupled with Best Buy's aggressive competitive pricing efforts, came at a higher-than-expected cost to the company's bottom line. The company now expects operating income to decline in Q4.

Total revenue slumped 2.6% to $11.5 billion over the holiday shopping season, with domestic sales slipping 1.5%.

"Their initiatives are not driving traffic," Michael Pachter, a Wedbush Securities analyst who has an "Underperform" on shares, told Bloomberg. "They are positioning as if competition will go away, and it won't. The Internet never sleeps."

The Internet proved to be Best Buy's one bright spot. U.S. comparable online sales climbed 24% over the holiday period.

Yet while its website receives more than a billion visitors per year, just 1.3% of those visitors actually purchase a product. Most use the site simply to peruse and conduct price checking. And competing with the likes of Amazon isn't easy.

Investing in Best Buy (BBY) Stock Now

Some traders see a short-term opportunity in BBY shares amid Thursday's painful plunge. The feeling is the steep one-day nosedive is an overreaction, leaving shares cheap.

But for long-term investors, Best Buy's future is too dismal. These shares have plunged for a reason. In fact, it was that kind-of bargain hunting mentality behind BBY's meteoric rise in 2013 - which isn't guaranteed to be repeated.

You see, a good part of last year's stellar showing can be attributed to a short squeeze - a rapid increase of a stock's price due to lack of supply and excess demand. It typically occurs when short sellers rush to cover positions.

Long term, however, Best Buy doesn't look good...

Troubling signs include these three factors:

  • In a move that suggests Best Buy sees an end to its big-box retail stores, it announced plans last year to close 50 stores and shift focus to smaller "mobile" locations. It has also begun leveraging its more than 1,000 brick-and-mortar locations, where foot traffic has notably slowed, by increasingly shipping merchandise from stores to online customers. And since music, movies, videogames, and books are all now available in digital and streaming form, sales and stock of these off-the-rack, antiquated items at Best Buy are disappearing - along with customers.
  • With Apple Inc. (Nasdaq: AAPL) selling its hugely popular iPhones, iPads, and iPods online and at its own stores, Windows devices sold at Microsoft Corp.'s (Nasdaq: MSFT) web store, and Google Inc. (Nasdaq: GOOG) peddling its Android and Chrome devices at its Google stores, the need for Best Buy outlets is quickly fading. Add in growing competition from one-stop shopping discount stores such as Target Corp. (NYSE: TGT) and Wal-Mart Stores Inc. (NYSE: WMT), and Best Buy suffers further. Convenience is key for many shoppers.
  • Then there's Amazon.com Inc. (Nasdaq: AMZN), the world's largest online retailer. According to a Wells Fargo study, the e-commerce giant beats bricks-and-mortar retailers across the board on average electronic prices. On Cyber Monday, its busiest shopping day of 2013, Amazon reported customers ordered a whopping 37 million items, up 39% from 2012. Boosting sales was an increase of "mobile shopping" from smartphones and tablets. This in spite of efforts from Best Buy to thwart the practice of showrooming-perusing in stores while buying online. Amazon's 2013 mobile e-commerce sales have been estimated at $20 billion. Best Buy started seriously losing market share to Amazon in 2011, before the explosive mobile payment movement. And the bleeding continues, especially in its bread-and-butter categories of televisions and computers, where online price comparison is easy and essential for serious buyers.

Amazon.com made our list of tech stocks to buy this year; see what other three leaders made the list here...

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