Retailers: The Search to Buy, Not Buy From

There are certain stores that I really like going to and buying stuff. Just because I will burn my cash at their altar, does not mean that I want to own the retailer itself. Amazon would be my choice, but its valuation scares me. I might be a fool for avoiding it on those grounds, but I would rather be sorry and keep my money. Still there have to be some physical retailers out there that are worth taking a stake in.

Support Your Local Bookstore

I wish we could keep bookstores for cultural reasons, but they are businesses after all. Even if Barnes & Noble (NYSE: BKS) stays in business there is no guarantee that the physical stores will remain. I don’t get around to the bookstore as much as I would like. Plus, I got a Kindle Paperwhite and am out of space for physical books. Perhaps if the chain disappears, then lower overhead local bookstores can see a resurgence.

Barnes & Noble has no debt, but only $213M in cash. The trailing twelve months net income is -$117.41. That makes me concerned about the company going forward. The most recent earnings call said the company did not produce the sales it was expecting from some new products in the 2012 holiday season. It is a tough market. The Nook has done well carving out a space for itself, but if the company as a whole cannot generate profits to keep moving along and growing it would not mean much. The inability to generate sales during the holidays, which is critical for a retailer, has me worried about the company’s future.

Barnes & Noble may be snapped up. Between the losses, weak holiday sales, and cash position it seems that the company is able to muster a last stand, but what would it do? Make a new tablet? Nook Media is a joint venture with Microsoft, maybe that could save it. I do not think the joint venture alone won’t be enough.

The Last Electronics Hero

Best Buy (Nasdaq: BBY) has validated its believers when it comes to the stock. It is up 81% for the year so far. That is impressive, considering we are only in month three. You should not be fooled by the stock price, because the company’s future still has some dark clouds. Closing stores is fine, but how are they going to change existing stores to stay relevant? Being the only retailer for the Leap Motion is a good start. The company lost money over the last 12 months with a trailing EPS of -0.74. Its most recent quarter was profitable, so hope is not lost. Best Buy needs to consistently add cash and value onto the balance sheet in order to maintain its dividend and keep its options open for potential expansion.

It might be a good idea for the company to offer more niche technology products. People looking for any camera will turn to Amazon, although they might go to Best Buy to see it before buying. If Best Buy can carry specific cameras that Amazon does not commonly carry or that it cannot command a low price on due to its specialized nature, then it could benefit from a smaller but more purchase-oriented customer base. It would also allow the stores to have a smaller footprint, though not as small as RadioShack. Best Buy could also consider developing its own product like Barnes & Noble did with the Nook to draw customers in, perhaps a tablet instead of a reader.

Odd Things You Never Knew You Needed

Whenever I go to Bed, Bath, and Beyond (NYSE: BBBY) I always end up with something I barely use, but actually need. Last time it was an electric grill. I barely use the grill, but when I am in the mood it is an absolute necessity.

Bed, Bath, and Beyond is doing well. Its trailing twelve months net income is $1B with a trailing EPS of $4.36, and it is seeing both top line and bottom line growth. It sports no debt and almost $800M in cash. Contrast that to Barnes & Noble’s situation. Bed, Bath, and Beyond also sports 8.61% net margins, which is higher than I would expect from a retailer. It establishes the company’s place as a specialty retailer that can have higher margins. There is nothing at Bed, Bath, and Beyond and other stores the company owns that you can’t find anywhere else.

This company is actually opening more stores, as opposed to Best Buy and Barnes & Noble who are downsizing. Opening new physical locations is another surprise from the company that also establishes its nature as a specialty retailer.

Oddities Win

Make no mistakes about how much of a gamble Best Buy is. There is some hope it can make a move that will keep it relevant to the future of retail, but that does not make it a buy for the vast majority of investors. I generally like the risky, turnaround stocks, but until I understand how Best Buy will innovate for the future I am waiting and watching. What little information we have regarding its plans have not been enough for me to get off the bench.

I have made my opinion of Barnes & Noble quite evident. I am not sure how it will manage to remain a physical retailer. That would be shame, but the market for physical books is shrinking fast.

Bed, Bath, and Beyond has positive earnings, expansion plans, and actually has physical stores I could see sticking around. I would still take a small position in this retailer, because I see it growing steadily but slowly. Eventually, it will just be a dividend investment. The century long outlook for retail remains bleak. The thing about Bed, Bath, and Beyond is that while many of its products can be found online in one form or another, you need to go to the store to see the things to realize you need them.

Additional Riffing

I just visited a Barnes & Noble. That damn place gets me every time. I am buying books from Amazon, books from Barnes & Noble, books from everywhere. I’m going to have no money and no space wherever I live because I will be buried under books. Not even going to venture into Bed, Bath, and Beyond. Can’t pay premium for that stuff.

Best Buy is a gamble as I have said. I really am not sure about the future. I am not just being coy to avoid the internet hate mail. People love their stocks and Best Buy is up like a ton of percentage points in the first three months of this year. I used to only go to Best Buy for cables that I needed right now.

Even Barnes & Noble probably can’t keep physical stores. Any company that is closing stores will eventually be irrelevant. The K-Mart’s in my area closed, but there are still some in my greater metro area. I have not met someone who has been to a K-Mart in recent memory. Everyone goes to Wal-Mart or to Target or… Costco. Things were a bit brighter for K-Mart, because I remember reading that they owned the land their stores were on, so closing stores and selling the property led to capital inflows. For stores that pay rent, only the reduction in overhead comes with closing a store. I don’t know why I wouldn’t own a Nook. I had a Sony Reader, because I was a follower of e-Ink’s development and the reader was one of the first. Now I have a Kindle.

Not much to add here. So lets just close this one out. Just remember closing stores equals bad. Bed, Bath, and Beyond is the only company on this list adding stores.