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The market is killing Best Buy (BBY) as I write this during the afternoon trading session. The stock is down 9.5%. Trading volume is extreme. You just know there has to be an earnings-report catalyst behind the carnage.
For the third quarter, Best Buy increased sales by 5% and adjusted diluted earnings per share by over 50% to 53 cents. Same-store sales jumped 1.7%. Now, a 1.7% expansion of comps isn't something to write home about necessarily. However, last year at this time, Best Buy saw a decline of 5.3% in the metric, so let's understand the perspective. According to our earnings preview, the market would have been satisfied if income had fallen somewhere close to 43 cents per share.
Okay, are you puzzled yet? What caused the sudden bearish turn on the stock?
Well, even before I checked around, I noticed the dip in the gross margin. In the current quarter, the stat was 24.5%. In the comparable quarter, it was 24.9%. I had a feeling this might be the culprit.
Sure enough, news articles like this one at Dividend.com were talking about gross margin forecasts. Management had better get working on the issue if it wants to please Wall Street.
Personally, I think the selling action today was too harsh. I don't necessarily accept the bearish sentiment given the other numbers.
At the same time, I wouldn't step up in this session to purchase shares of the retailer. Not only would I rather study the situation a little more to get a sense of how the story is evolving in terms of competitive pressures from players such as Wal-Mart (WMT) and Target (TGT), but my belief is that the shares have more risk to the downside given the conviction in the sell-off as indicated by the volume.
Best Buy's stock should recover, but it might be too early to take a position.
Disclosure: I don't own any company mentioned; positions can change without notice.
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Reader Comments (Page 1 of 1)
12-15-2009 @ 8:13PM
mandmjlrscvca said...
It is fascinating how virtually no one will believe that Best Buy is going the route of Circuit City. Closing all retail outlets or stores. They have been progressively putting all their products plus online and will in time.....not far in the future, shut down all their stores and go 100% online except for some repair centers strategecially located which will be profitable since it is a service oriented part of the business that will do quite well. In conclusion, tens of thousands will lose their jobs, there will be vacancy's a many in the strip malls across the country. Included too is the loss of all the taxes they and the employees have had to pay to the fed and states.... the lost sales tax revenue too... and the beat goes on.