Blame Bargains for Best Buy’s Demise

by Jon Markman | December 22, 2011 5:00 am

Even the Grinch recognizes a great holiday sale when he sees it.

The Commerce Department recently reported core November U.S. retail sales rose 0.2%, representing the 11th consecutive month of positive growth. But it also represented the smallest rise since June of this year, and the results came in at exactly half the growth of analyst expectations.

It was a cold splash of water to the face of optimists. Retail analysts were cackling a few weeks ago that Black Friday sales had surpassed all expectations[1], with sales up 6.6% from 2010 to $11.4 billion, the largest amount ever recorded. Foot traffic rose 5.1% from a year ago, and the rose-colored-glasses crowd said the economy was back on track.


So why the apparent discrepancy between then and now? Well, the disappointing recent retail sales figures give us a glimpse into the full story: Consumers were hell-bent on holiday gift shopping and blew off everything else in their lives like, you know, food.

Best Buy BBY
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Considering electronics actually was one of the biggest gainers, it was a shocker for many to see that Best Buy (NYSE:BBY[2]) reported third-quarter earnings far short of expectations last week. Shares tanked 15% on the news.

I had recommended shorting the electronics retailer the prior week. Best Buy was a great store in the pre-Internet age, but since 2005 it has lost its way, and shares have come down by 50% — and are headed still lower.

Best Buy BBY
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You really have to cut through the hype to see what’s happening. Best Buy reported a 7% increase in same-store sales for the promotions on Black Friday, but that was it. After that, shoppers stayed away.

Earnings were 14% below last year’s results and eight percentage points below consensus expectations. Gross margins came in below expectations while overall sales and foot traffic were better than expected. This points to huge sales discounts to help drive revenues, but to the detriment of margins[3]. This is the central problem for all retail.

On the conference call, Best Buy chief financial officer James L. Muehlbauer admitted that consumers have been very price-conscious. This forced the chain to cut prices, which smashed margins. Alan Rifkin, a Barclay’s analyst, told clients this is the wave of the future.

Bottom line: Unless marketers can invent a holiday in which people want to buy expensive stuff at full price (hello, Valentine’s Day!) consumers are not going to be the savior of this economy.

Jon Markman operates the investment firm Markman Capital Insights[4]. He also writes a daily trading newsletter, Trader’s Advantage[5], and a long-term investment service, Strategic Advantage[6].

  1. Black Friday sales had surpassed all expectations:
  2. BBY:
  3. but to the detriment of margins:
  4. Markman Capital Insights:
  5. Trader’s Advantage:
  6. Strategic Advantage:

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