Markets
Best Buy Shares Anything But
Tara Murphy, Forbes.com, 11.09.00, 1:34 PM ET
NEW YORK - Wall Street was merciless on Best Buy today, pummeling the specialty retailer more than 37%, after it warned that the slowing economy and industry competition were cutting into its bottom line.
But consider the state of the economy. Is this shocking news? After all, retailers don't exactly perform well when customers taper spending. Scott Ciccarelli, retail analyst at Gerard Klauer Mattison & Co., says it was the size that mattered.
"The severity of the shortfall was a surprise, but we've had a neutral rating on the company for a while now," he says. Ciccarelli says that Best Buy's (nyse: BBY) appliance and PC segments, which were highlighted as problem areas during the company's conference this morning, are particularly concerning, due to severe promotional pressure.
So just how much of a shortfall are we talking here? Best Buy says that it expects to see third-quarter earnings of about 27 cents a share, which would greatly miss the First Call/Thomson Financial estimate of a 44-cent profit. The fourth quarter also looks bleak, with projected EPS of 90 cents a share, also falling below the First Call/Thomson Financial estimate of $1.02.
And Ciccarelli doesn't see the pressure dissipating soon. "I think business will remain a challenge as you fight a slowing macroeconomic environment. And now we're starting to see commoditization on some of the digital products that have really helped drive their business, such as DVD hardware and software."
Cicarelli says that the price decline in DVDs opened the door for discounters to market the products, which inevitably chipped away Best Buy's market share. Forced to compete, Best Buy lowered prices, which led to pressure on its margins.
"When it was a $300 product, Best Buy was only one of a handful of companies specializing in this area. But now that we're down to $100 price points [the cost of the product], places like Wal-Mart are good at selling these products," says Cicarelli.
In afternoon trading Best Buy was sinking $19.63, or 37.4%, to $32.75, after closing yesterday at $52.37.
Elsewhere in retail, Wal-Mart (nyse: WMT) was off 2.3%, while Circuit City (nyse: CC) was down 9%.
It was Circuit City's warning on Oct. 20 that tipped off Ursula Moran, retail analyst at Sanford Bernstein, about Best Buy's prospects, which led her to cut her estimates for the third and fourth quarters. "When Circuit City came out with bad news, we took our numbers down on both stocks. I didn't think they could make their numbers in like of the deteriorating environment."
But Moran argues that Best Buy isn't losing market share, citing that the company sees third-quarter comparable same-store sales at 5%. Still, Moran admits that discounters do pose a threat to a specialty retailer, but how much of a threat is the question?
"The pressure is real because discounters can move larger volumes at popular prices. But I think that it's limited because they're not equipped to sell high-end products, and the nature of them says they're only going to offer a narrow assortment."
And despite today's warning, Moran remains a long-term bull on the stock. "Best Buy has no balance sheet debt at this point. It has excess cash north of $500 million and physical growth ahead," all this at a time when the retail environment is slowing.
forbes.com
Fred, I know you follow the stock so I thought I'd pass it along. You are probably right on the severity of the decline. Not like it is a dotcom.
Jack |
