Best Buy (BBY) reported sales numbers Friday morning that, at first glimpse, seemed like a good sign for management's turnaround strategy for the troubled company. After breaking down what the report really told us, it seems that the market overreacted with a 16% price jump by the close of trading on Friday.
The report said that same-store sales remained flat during the holiday season but, when online sales figures are taken into account with reported stores sales numbers, it seems more likely that in-store sales actually fell by close to 1%. Some analysts called for a 2.5% decline in sales and may consider a 1% drop as good news, but that can just as easily be attributed to better than expected consumer spending. Online sales grew a meager 10%, less than the National Retail Federation's projection of 12% overall growth in online retail for the season. Online sales grew an average of 15% during the 2011 holiday season, growth fueled at least partially by Amazon.com (AMZN).
Best Buy ran promotions of all kinds just to get customers in the door, which seems to have worked for the time being, but the cost of making those sales is still unknown. Promotions included rebates for smart phones and price-match guarantees, aimed at combating online retailers. Margins are expected to decline even more than last quarter due to these promotions.
The sales report also included a revised free cash flow projection of down from $850 million to $500 million. November's earnings report gave a picture of a cash poor company that had already spent a lot of the money it was expected to bring in during the holidays. On top of that, restructuring charges for the first three quarters of 2013 totaled over $250 million, a significant part of which was cash outlay involved in closing 50 U.S. stores. The company can't even shut down a store without a serious cash outlay; this does not indicate a bright future.
So why, given all this bad news, did the stock rally a whole $2 on Friday? According to NASDAQ, short interest in the stock was probably in the low 30 million shares range, possibly as low as 25 million. Friday saw over 40 million shares traded, while the daily average is closer to 10 million. Much of that volume is attributable to a short covering rally, while the rest was probably misguided investors buying the news. The stock may have some space to run a little bit more, but it will mostly be the remaining shorts covering their positions.
Friday's rally was a gift from the short sellers who had to get out, a chance to short the stock back to where it was on Thursday. Anyone who read between the lines and sold the rally is set to profit, but it's not too late to get in at the beginning of this week and ride the wave back down.
Stock outlook and sales estimates analysis by Rick Aristotle Munarriz. Additionally, Rick noted that the rumor of Richard Shulze making a private buyout offer is not a threat. If anyone wanted to buy the company, they could wait for the stock to degrade further for a much cheaper purchase price.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in BBY over the next 72 hours.