Image: Best Buy Store © AP

Related topics: stocks, electronics, Best Buy, retail, Michael Brush

Is it time to say bye-bye to troubled Best Buy?

A lot of big-picture trends are running against the electronics giant and its team of Blue Shirts:

  • Online competitors like (AMZN, news)continue to steal business from Best Buy (BBY, news)with better prices. One running joke has it that Best Buy's role now is to serve as Amazon's showroom. Big chains like Wal-Mart Stores (WMT, news)also compete heavily on price.
  • Who buys CDs and DVDs at Best Buy (or anywhere) anymore, now that it's much more convenient to download them or to watch or listen online?
  • Consumers are on the ropes. About 6 million of the jobs lost in the U.S. since the recession started have yet to be replaced.
  • And for those who do have jobs and money, there's no new consumer-electronics craze on the horizon, like flat-screen TVs, to drive people into Best Buy's big-box stores. Sure, Apple (AAPL, news)keeps cranking out hit products like the iPad -- but Best Buy has to complete with Apple's own stores for those.

All of these trends continue to put downward pressure on Best Buy results. The company reported a 1.7% decline in sales at stores open more than a year, as well as lower profit margins. On June 14, Best Buy also reported earnings of 35 cents a share, a penny lower than a year ago. Last year's sales fell by a similar amount, following two years that saw healthy sales gains of 5% or more.

The market hasn't forgotten that similar trends forced Circuit City to close its big boxes in 2009. (The brand survives online.) Since Thanksgiving, shares of Best Buy have fallen 34% to about $30, yet it still ranks among the most heavily shorted Standard & Poor's 500 Index ($INX)stocks, as many investors bet it will fall even further.

Image: Michael Brush

Michael Brush

Can Best Buy weather the storm? I think so, although it may look different in the future. In fact, the stock may be a buy for investors right now. To see why, here's a look at the challenges that have investors nervous, and why Best Buy should overcome them.

The big box is dead

Across retailing, from Wal-Mart to Target (TGT, news)and Kohl's (KSS, news), national chains are moving to smaller stores. "The biggest winners are the people with smaller boxes," says Howard Davidowitz of Davidowitz & Associates, a retail consulting and investment banking firm, citing the success of retailers like Dollar Tree (DLTR, news). "There's a sea change out there."

The backstory: In a sense, big-box stores -- which sprung up in the 1980s -- were the precursors of Internet shopping, says Eric Johnson, a professor at the Tuck School of Business at Dartmouth. They offered a vast array of products in one place at cheap prices. When the actual Internet came along, big-box stores looked outmoded. "There really isn't anything compelling about big-box stores anymore. They can't compete on cost or product offerings," says Johnson.

Consumers now favor smaller stores that force retailers to select the best merchandise rather than just putting everything on the shelves, says Davidowitz. "That's one of the reasons consumers hire retailers."

In this environment, Best Buy looks like a paintball target. Most of its 1,317 U.S. stores, 1,100 of them, are big box.

But the Blue Shirts are on the case.

In a recent meeting with analysts, Best Buy announced plans to reduce the square footage of its big-box stores by 10% over three to five years. The chain will also lease out floor space to other retailers, says BB&T Capital Markets analyst Anthony Chukumba.

The retailer also plans to add 600 to 800 small-format Best Buy Mobile stores over the next five years, on top of a current base of 180. That'll help boost profit margins, which are higher on smartphones and mobile-phone-service contracts. Best Buy has only a 6% market share in mobile phones, compared with a 22% share in most lines of consumer electronics, suggesting there's plenty of room for growth, says Chukumba.

Besides, while smaller stores are popular, it's not really clear that the big box is dead, maintains George Whalin, a retail sector expert at Retail Management Consultants. He cites the recent success of Costco (COST, news), Macy's (M, news)and Nordstrom (JWN, news). "The superstore is dead -- that's just nonsense," says Whalin.

Amazon, Apple and Netflix steal business

There's no question that a lot of Best Buy's business is shifting to online retailers. Internet delivery of music and video is hurting Best Buy CD and DVD sales, which used to drive a lot of traffic into its huge stores, points out Stephan Hoch, a marketing professor at the University of Pennsylvania's Wharton School. Entertainment-related revenue plummeted 13% last year at Best Buy.

Plus, in TVs, laptops, tablets and cameras, online retailers like Amazon can beat Best Buy on price, since they have lower overhead and typically do not collect state sales tax. A lot of consumers check out products in Best Buy stores, then buy them online at a lower price.