Best Buy (NYSE: BBY) demonstrated how brick and mortar brands have such a tough-time competing with Amazon (NASDAQ: AMZN). A questionable acquisition shows how little knowledge of the market and technology Best Buy’s management has.
Best Buy purchased Great Call for $800 million, a press release revealed. Great Call markets the Jitterbug; a “smartphone for dummies,” widely advertised on American television. Other Great Call products include one-touch emergency communications solutions for senior citizens.
The logic here is that the number of people over 65; and Great Call’s market, is growing. Disturbingly, many analysts agree with the dubious strategy, Forbes contributor Grace L. Williams noted.
The thinking behind Great Call is that every senior citizen is an incompetent and technophobic boob. This strategy will offend tech-savvy seniors like President Donald J. Trump (R-New York).
What’s wrong with Best Buy’s Great Call Acquisition?
I see two big problems with Great Call that can make it a drain on Best Buy’s bottom line.
Great Call is a direct marketing company. It sells specific products directly through various channels. Best Buy is a general-purpose retailer that sells a wide variety of products and services through brick and mortar stores. I do not see the synergy there.
Any smart engineer in today’s world will easily replicate Jitterbug and Great Call’s other products. The Jitterbug is just a smartphone with larger buttons. Anybody can reprogram a smartphone to make the buttons larger or simplify the screen.
A high demand for Jitterbug would prompt Apple (NASDAQ: AMZN); and Alphabet (NASDAQ: GOOG), Android’s owner, to copy it. Best Buy is a good retailer but can it compete directly with Apple and Alphabet?
Apple and Alphabet have far greater resources; and many more engineers, on the payroll. The gravest threat to Jitterbug is a senior app that can make any phone easy to use at the press of a finger or a voice command. Devices like Amazon’s Alexa can call 911, Instacart, GrubHub (NYSE: GRUB), Lyft, Uber, and family members for seniors.
My guess is that both Apple and Alphabet are both working on a senior app. It is a smart bet that Amazon is building a senior app for Alexa. Best Buy lacks the resources and expertise to compete with those tech giants.
Best Buy Needs to work with Amazon, Google, and Apple not against them
Best Buy needs to work with tech giants like Amazon (NASDAQ: AMZN) not against them. Competing with Amazon, Apple, and Alphabet (NASDAQ: GOOGL) is a losing proposition for Best Buy.
A smarter strategy is joining forces with the giants. Opening a mini-Apple Store in Best Buy locations would be a better use of space and money than Jitterbug. Offering service for products sold through Amazon or the Apple website will attract far more customers than Great Call’s “seniors are dummies marketing strategy.”
An exclusive Android Phone sold through Best Buy under the Motorola brand would reach a far larger market than Jitterbug. Google can design special versions of that phone for seniors that want simplicity or larger buttons.
A much better use of the $800 million would have been to offer same-day delivery through Instacart or Google Shopping Express. The Instacart driver would deliver electronics. Best Guy’s Geek Squad would provide the service.
Geek Squad can deliver items that require installation or additional work. Combining Geek Squad with Instacart would enable Best Buy to compete with Amazon.
A brilliant move for Best Buy is to sell electronics installed by Geek Squad through Amazon. Since Amazon is where Americans shop these days, Best Buy must be there.
By acquiring Great Call, Best Buy is competing directly with Apple, Amazon, and indirectly with Alphabet. I cannot see how Best Buy can win that battle.
Is Best Buy a Value Investment?
One question acquisition will not make a company a bad investment. Best Buy is far more than just Great Call, and it is making money.
Best Buy Co. reported revenues of $9.109 billion for 2nd Quarter 2018. Those revenues were up 6.81% from $8.528 billion in 2nd Quarter 2017. Best Buy’s revenues are growing without Great Call.
The retailer made some money from those revenues. Best reported a Gross Profit of $2.125 billion, an operating income of $265 million and a net income of $208 million for 2nd Quarter 2018.
Cash Flow Explains why Best Buy Bought Great Call
The cash flow explains why Best Buy is interested in Great Call. Best Buy reported a free cash flow of $23 million and an operating cash flow of $204 million on May 5, 2018.
Great Call sells monthly plans which generate float. Float, is a stream of continuous revenue, Best Buy can tap for other purposes. Great Call’s phone plans are like the insurance premiums Warren Buffett used to finance Berkshire Hathaway. Owning Great can give Best Buy more cash.
Best Buy had extra cash in the form of $1.848 billion in cash and equivalents and $2.633 billion in cash and short-term investments on 5 May 2018. Ideally, Great Call would provide enough cash to enable it to avoid the death spiral.
The death spiral occurs when a retailer is not generating enough cash to pay its bills. The death spiral is a constant risk when retailers operate at low margins.
How safe is the Best Buy Dividend?
The extra float generated by Great Call can shore up Best Buy’s dividend. Best Buy is a respectable dividend stock.
Best Buy shareholders received a dividend of 45¢ on July 5, 2018. The BBY stock offered a dividend of yield of 2.21%, an annualized payout of $1.80, and a payout ratio of 35.9% on August 21, 2018.
The Best Buy dividend has grown significantly in recent years. It was 34¢ in 2018, 28¢ in 2016, and 23¢ in 2015. Best Buy paid an extra big dividend of 73¢ in April 2016. Deliciously, the Best Buy dividend has been growing for six years.
The Great Call deal casts doubt on the stability of the Best Buy dividend. I have to wonder if Best Buy is trying to buy float to support the dividend. It can find better uses for that $800; including paying off most of the $1.342 billion in debt Best Buy reported on May 5, 2018. Expanding Geek Squad by offering more same day delivery would be an even better use of that cash.
Mr. Market overvalues Best Buy
The market overvalued best Buy at the $82.08 it traded for on August 24, 2018. The share price is high because Best Buy is very vulnerable to competition.
The two most dangerous competitors are Amazon and Apple. Amazon offers everything Best Buy carries at competitive prices. The Everything Store offers the advantage of “shopping from the couch” to lazy people and those who hate shopping.
The Apple Store is Best Buy’s most aggressive competitor in the consumer electronics sphere. A true nightmare for Best Buy would be Apple opening mini-stores in other retailers. Apple Stores in Kroger Marketplaces or Walmart Supercenters would compete directly for Best Buy’s core market of middle-class women.
Dark horse threats to Best Buy include retailers like Nordstrom (NSYE: JWN). Nordstrom is opening local stores that offer convenient pickup of online orders in the neighborhood. A Nordstrom/Apple store or Nordstrom/Amazon Go combination is a direct menace to Best Buy. A Nordstrom/Apple store inside Kroger or Target (NYSE: TGT) is game over for Best Buy.
Investors need to stay away from Best Buy. This company is making questionable acquisitions and ignoring retail realities. Geek Squad makes Best Buy a potential leader in same-day delivery. Great Call adds little value and raises serious questions about Best Buy’s future.
You should purchase BBY if it makes major investments in Geek Squad. Avoid this company as long as it dabbles with garbage like Great Call.