Best Buy Reports Better Earnings, Warns About 4Q Margins

12.15.2009

07.14.2010 update: (BBY stock quote) (page bottom)

Best Buy Reports Better Earnings, Warns About 4Q Margins

original article written by Net Advisor™

The home electronics giant, Best Buy (BBY) reported that while 3rd quarter profits beat expectations, 4th quarter profit margins would be reduced sending the stock down as must as 9.00% on 12-15-09 to close at $41.35 down $3.84 or 8.46%.

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Best Buy is really the ONLY major electronics retailer left after the last competitor Circuit City filed for bankruptcy liquidation earlier in 2009. The Circuit City name and website was acquired out of bankruptcy by Systemax, Inc.(SYX) who also owns brands such as CompUSA (who also filed for bankruptcy in 2002) and TigerDirect.

Last year, Best Buy held 23.6% market share in consumer electronics compared to Wal-mart’s 14.6% market share and 2.6% market share for Amazon.com (source: Nasdaq.com (story link #200909151728 gone))

Although Best Buy’s stock is down today, I argue that it is the economic landscape, not so much competitive forces that is driving down 4th quarter profit margins.

Stores such as Wal-Mart sells mostly low end quality TVs and have a limited selection compared to Best Buy. If Wal-Mart decided to make electronic retail a substantial part of their business in terms of store real estate, that could impact Best Buy’s pricing.

In contrast, Amazon.com had a 62% increase in earnings from its latest report. The problem of buying large items such as big screen TV’s on-line is shipping cost, delivery and set up. Unless one is proficient in setting up and calibrating their new big screen, especially to a home theater, it might be easier to get help from a local retailer.

Spending has been down due to cash strapped, job strapped consumers. They want the lowest prices and a brief sale (such as Black Friday) at big discount can boost sales. But when the sales are over and only modest price reductions exist, many consumers just might say, “eh, I don’t need that.”

Best Buy is likely to thrive again when the economy really improves, and that means consumers are more financially stable, and jobs are increasing. In the short run, taking reduced margins, seek to gain or maintain market share, and still operate having actual sales, may just be a better business strategy.

07-14-2010 update:

Best Buy (BBY) stock closed at $34.95

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