Circuit City's Bankruptcy Is Great News for Best Buy

A week after announcing it would close 20% of its stores, electronics retailer Circuit City (CC) has announced it will file for Chapter 11 bankruptcy protection. While that really is no surprise (retailers can't operate in the red forever), investors should consider who wins from this development.

The most obvious choice is Best Buy (BBY), the leader in the space. Although CC is a weak player, there are many places where Best Buy and Circuit City locations are very close to each other. Given the store closings, plus the stigma of Chapter 11 with the stores that will remain open, BBY should see some incremental benefit. BBY trades at 8-9 times earnings, quite a low price for the best managed consumer electronics retailer.

Full Disclosure: Peridot Capital was long BBY at the time of writing, but positions may change at any time.

Comments

[Dustin:]

You have to think to some degree that with CC closing it could actually be a bad thing for BBY. Imagine those cities that have the two retailers located close together....direct competition. Take one of them away and all of a sudden you have no benchmark, no standard for a big box retailer in that community. Granted, BBY will continue to be successful because of who they are and what they do, but consumers shopping at CC were going there for a reason. In football, you don't recruit just one quarterback and hope he works out. You recruit many with the intention of each one pushing each other to get better. Well, BBY has always been the better one, but where will they end up with no one pushing them??? Just a thought.

2008 Nov 11 02:13 PM

[Marc Gerstein:]

I can see where BBY might benefit, but whether they do or not seems to me an open question. Here's a copy of an e-mail I just sent to BBY:

"I was intrigued by BBY’s latest earnings release.

'Yes, consumer spending is under very severe pressure. But it looks to me like BBY is doing extra things to worsen its situation, namely following the Circuit City approach to customer care.

'Last night, my family walked into the store on Northern Blvd. in Long Island City intending to spend $700-$900 on a flat-screen TV. After considerable frustration trying to find a sales person who would help us, we gave up and walked out empty handed.

'Perhaps BBY has been on top for too long and is getting a bit complacent re: its customers."

2008 Nov 12 10:03 AM

[billddrummer:]

I see BBY making it through this period bloody but stronger. Some of the internal management initiatives (proprietary) are still effective, and will continue to bear fruit in subsequent quarters.

With BBY trading at close to its intrinsic value and far stronger than its principal competitors, 9X earnings seems a reasonable entry point.

2008 Nov 12 11:34 AM