Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Best Buy: Weak Sales, Weak Margins, More Buybacks


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

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 (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

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
< Previous
  • 1
Next >
Position in AAPL
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos