Best Buy (NYSE:BBY) had high hopes for this holiday shopping season. Black Friday sales numbers hinted that Best Buy was a big winner, going big on discounts and exclusive in-store deals after a rather lackluster showing last year.
After Tuesday’s earnings report for the third quarter, however, Best Buy investors might be getting a lump of coal under the tree. The big-box electronics giant saw profits slump 13%, predicted weak margins and stuck with its previous conservative forecast for future sales.
The result is a brutal 10% slide in BBY stock in early trading today — which might only be the beginning.
Here are the specifics on Best Buy: The retailer’s fiscal third-quarter profit fell 13% to 42 cents per share, or about $154 million. That sounds like a lot of money, but when you consider it made 54 cents per share, or $217 million, last year — and that the company raked in higher sales revenue this time around — you get a disturbing picture.
How can a company sell more but make lower profits? Simple: It sacrifices margins just to move merchandise. That’s exactly what Best Buy was doing this holiday season — offering mega deals on electronics but making little profit. And that’s after BBY slashed its seasonal work force by half to save on costs, hiring just 15,000 workers for the holidays vs. almost 30,000 in 2010.
The downward spiral of earnings is set to continue as margins remain meager for the foreseeable future. BBY said in its Tuesday earnings report that it expects profit margins to fall by about one-half of a percentage point across the entire fiscal year of 2012! That’s not encouraging. Don’t expect a revenue boost on the way either, as Best Buy predicted same-store sales to be flat at best — and down 3% in a worst-case-scenario for 2012.
This is a very disappointing development for investors. Obviously, those who thought that Best Buy’s earnings would be propped up by holiday sales were let down. However, other headlines today hint that the rosy holiday retail outlook might have been premature for the entire sector. We learned this morning that retail sales rose less than expected in November, as a drop in receipts for food and beverages offset stronger vehicle sales. When people cut back on food and drink over Thanksgiving, you know there’s trouble. Overall retail sales increased a paltry 0.2% on the month, according to the Commerce Department.
For Best Buy, the softness in retail and its ever-shrinking margins will continue to cause the stock to suffer. But other retail investors need to take notice of this as a warning sign. The race to the bottom on prices this holiday season might entice shoppers, but it will not result in big profits for corporations selling goods at razor-thin margins.
And as November retail sales indicate, even the deal of the century isn’t going to prompt an out-of-work family to splurge on a flat-screen TV.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.