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Best Buy: Weak Sales, Weak Margins, More Buybacks

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Best Buy's fundamentals continue to deteriorate, yet the company can't get enough of its own stock.

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Last month, I opined that Black Friday's creep onto Thanksgiving was a symptom of the margin-killing competitive landscape encompassing America's big-box retailers. (See: What Does Black Friday's Creep on Thanksgiving Say About American Retail?)

This morning, we saw the first sign that the great margin suck was on for the 2011 holiday season as consumer-electronics chain Best Buy (BBY) laid a rotten egg with its third-quarter results.

Here are the headline facts and figures:
  • Revenue rose 2% to $12.01 billion, coming in slightly below consensus
  • Earnings were $0.47 per share, missing by $0.04 per share
  • Same-store-sales rose 0.3%
  • Gross margins fell 90 basis points year-over-year to 24.2%
  • Operating margins dropped by 170 basis points to 1.5%
  • $320 million worth of stock was repurchased during the quarter
  • Strength was seen in mobile computing (including tablets), appliances,e-book readers, mobile phones, and movies
  • Weak segments included televisions, digital cameras, and video games
  • The company confirmed full-year earnings guidance of $3.35 to $3.65 per share
Now, the important thing to understand here from a big-picture perspective is that increasingly-desperate brick-and-mortar retailers are killing each other for whatever retail dollars aren't heading to Amazon.com (AMZN), which incidentally does not care about margins one bit. (See Amazon Making all the Right Long-Term Moves)

As for Best Buy itself, it would be one thing if it were seeing some sales benefit from more competitive pricing. But as you can see above, the opposite is true as sales and margins are simultaneously coming in below expectations.

Nonetheless, the company can't get enough of its own stock, as it sucked down another $320 million worth of shares during the quarter, bringing year-to-date share repurchases to a whopping $1.2 billion, or 60% of free cash flow. The obvious goal is to continue to shrink the share count to help the company hit near-term earnings targets, but it's not even accomplishing that.

It's also becoming quite obvious that the macro picture for consumer electronics continues to be just plain lousy.

We've seen three major semiconductor companies -- Intel (INTC), Texas Instruments (TXN), and Altera (ALTR) -- all guide down in the past week. The video-game industry grew by just 0.4% in November, despite the release of the biggest game of all time, Activision's (ATVI) Call of Duty: Modern Warfare 3. (See: "Modern Warfare 3" Hits the $1 Billion Mark: Why It Doesn't Matter). Smartphone sales growth also slowed considerably in the third quarter.

Thus, I'm leaving Best Buy where it belongs -- in the value-trap aisle.

The company's gigantic stores leave it exposed to multiple declining product categories (Windows PCs, televisions, physical media, digital cameras, etc.), and it has zero pricing power since it sells the same stuff as Wal-Mart (WMT), Target (TGT), and everyone else.

Yes, it's nice that Best Buy sells revolutionary products like the Apple (AAPL) iPad and the Amazon Kindle, but it'd obviously not picking up the slack from all the stuff that's dying.

And on the financial side, management continues to aggressively flush cash down the toilet with stock repurchases. That money could come in handy should the US economy fall back into a recession, or even be used for real returns of capital to beaten-down shareholders in the form of a higher dividend.

Twitter: @MichaelComeau

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