Best Buy: Will It Benefit from Rivals' Pain?

Piper Jaffray retail analyst Mitchell Kaiser this morning raised his rating on Best Buy (BBY) to Buy from Neutral, while boosting his price target to $33 from $22. His theory is that the benefits to the company from the bankruptcy of Circuit City (CCTYQ.PK) outweigh the current macro-economic headwinds.

Kaiser says gross margins should improve as the competitive environment eases in consumer electronics; he contends that Black Friday ads suggest that the competitive environment in November featured less promotional pricing than in previous years.

Kaiser believes the Circuit City - and the recent collapse of the Tweeter chain - could boost fiscal 2010 estimates by 16 cents a share. But he sees an even bigger boost - 67 cents a share - if Circuit City shut down all of its stores.

Tomorrow morning, Best Buy will report results for its fiscal third quarter ended in November; today Kaiser raised his EPS estimate to 27 cents from 21 cents, which puts him two cents ahead of consensus, largely to reflect a higher gross margin estimate. He expects gross margin of 25.1% versus the consensus of 24.1%.

He raised his EPS estimate for the February 2009 to $2.56 a share from $2.53; for FY 2010 he goes to $2.51, from $2.22.

I’d note that not everyone is so sanguine about the company’s near-term prospects; credit research firm Gimme Credit on Friday cut its credit rating on the company to “Deteriorating.”

In a late-Friday research note, Gimme Credit analyst Carol Levenson notes that the company in the long-run should benefit from the bankruptcy and liquidation of Circuit City, Tweeter and “whomever among its competitors might be the next to go.” But she adds that “in the short run it must join the lengthy list of retailers experiencing weaker sales, strained liquidity, and contracting margins.”

Levinson also notes that most of its merchandise is “largely discretionary in nature and margins in electronics were low to begin with even before the latest promotional binge.”

She also says that the company’s move into Europe via its joint venture with Carphone Warehouse, “instead of lowering risk through geographic diversification, is likely to increase its business risk during this critical period.”

As it happens, I made a visit to the Best Buy in East Palo Alto on Saturday, and the store was extremely quiet; just 2 of 9 checkout stands were open, and there was plenty of parking in front of the store. Meanwhile, the Circuit City store a few doors down was doing a brisk business for its going out of business sale; anyone need some employee break-room lockers?

Best Buy today is down 96 cents, or 3.93%, to $23.46.

Comments

[Chris B:]

Best Buy is 100% consumer discretionary. They are also an artifact of the consumer credit bubble, in which consumers ran up thousands of dollars in credit card debt to get the latest $500 home theatre, the biggest $5,000 LCD TV, hundreds of $15 DVD's that they've already seen, and dozens of $60 video games. This overspending is just another part of the same bubble that saw middle class people buying half-million dollar homes and $60k SUV's thanks to subprime financing. Those people are drowning in debt now.

The current 0% consumer savings rate is unsustainable, and will revert back to the long-term mean of 9% or so. Baby boomers who saved too little for retirement (and just lost what little they had saved) are looking at a bleak future that only gets bleaker with each dollar they spend on entertainment gadgets. Meanwhile, the rising number of unemployed don't buy Playstations or Ipods. This is all bad news for BB, just as it was for CC.

2008 Dec 15 12:49 PM