Best Buy Bounces on Circuit City Closure

Shares of Best Buy (BBY) are up almost 9 percent this afternoon after its closest rival, Circuit City, said it would liquidate all of its 567 U.S. stores. There's not much good news in the story, especially for Circuit City's more than 30,000 employees, but once some $2 billion worth of inventories are sold off, the retail landscape is going to look noticeably different.

William Blair analyst Jack Murphy says this is an "historic" moment for Best Buy, and says the company "is poised to enjoy a material benefit from the recently announced liquidation of its largest pure-play consumer electronics competitor." Specifically, Best Buy's domestic sales for the firm's fiscal 2009 (ending February 2010) could see a seven-percentage-point gain from the demise of their chief rival, which equals an extra 55 cents for 2009 earnings per share. William Blair raised its earnings target accordingly to $2.55 from $2.

A few key points in the analysis: Murphy says Circuit City had about $10 billion in annual domestic sales over the past four quarters, but weakness in the current sales environment makes Best Buy's opportunity closer to $7.5 billion. Best Buy could capture about 30 percent of that market share (or as much as $2.5 billion) in part because there are a whole lot of Circuit City stores close to Best Buy locations. Some 82 percent of Circuit City's domestic stores are within 5 miles of a Best Buy.

Still, there could be a downside for rival electronics retailers in the coming weeks as Circuit City slashes prices to rid itself of leftover inventories and forces its rivals to lower their prices in the short-term, according to Dow Jones. Also, MarketWatch cautions Best Buy against arrogance, warning that the disease that felled its largest rival could still be catching as the entire format of the big-box electronics retailer stares down stronger competitors including everyone from Wal-Mart to Amazon.com.

Comments

[Hayweed:]

The demise of Circuit City Also hurts:

Verizon (which has Verizon mobile stores inside Circuit City)
Rimm - which sells the phones and is the premier Verizon phone at Circuit
Dell, HP, Acer and any other pc maker - one less outlet

Who it helps

Apple - who is now head to head with all the box makers with its own special area at Best Buy. Apple also gets the premier phone spot at Best Buy and at Walmart. Itunes grows since one less retailer of cd's and dvd's

Walmart - they will get the lionshare of the business from Circuit

Jan 16 04:33 PM

[Tricky:]

Hayweed, you put forth some interesting food for thought. The only thing I will question is your last statement. All those Circuit City customers had an opportunity to go to Walmart before and they chose not too. For some, it may have been a location issue. But I'd be willing to bet it was mainly a format issue, so I'd guess that Best Buy will get more than their fair share of CC customers.

That said, I'm not going long on any retailers right now.

Jan 16 05:15 PM

[PastTense:]

I think the internet is going to gain a much bigger share of the electronics market--you can save a significant amount of money and it is more convenient.

Jan 16 05:35 PM

[The Good Ne...:]

Tricky,

Don't forget that when the Institute for Supply Management released its leading indicator report earlier this month, overall business activity was up by 6.6% in December. And can you guess the segment reporting the largest increase in business activity? Are you sitting down? Retail.
mast-economy.blogspot....

I agree PastTense. Have a look at Amazon. They posted their best Christmas ever. That is where I bought my consumer electronics for under the tree.

gne

Jan 16 08:21 PM

[Steven Hansen:]

a loss of a competitor to bankruptcy usually is bad news for competition. many purchases are spur of the moment (after seeing an advertisement or an item in a store) - and a buyer usually does a quick price check around. only there is less around to compare prices.

unfortunately there will be no winners here - only losers. the customer base which you assume will go elsewhere will, but everyone will be buying less.

Jan 16 10:33 PM

[Timmothy Posey:]

I agree with 'The Hand'. In addition, there's 30,000 less people without a job who will probably not be buying any electronics, cars, houses, cell phones, private schooling, computers, shoes, or new clothes any time soon.

Jan 16 11:13 PM

[Chuch:]

Circuit city is the first of many that are to come afterwards, see here crashmarketstocks.com

Jan 17 02:12 AM

[Rudeman:]

Best Buy is already arrogant. The smug smile will come off their faces as the economy gets better and stock analyst want to know why they can not deliver better numbers with no competition.

At one time Toys R Us put Playworld and others out of business only to get their stock price beaten down because analyst wanted them to capture more of the market. This Best Buy scenario is very similar.

Jan 17 07:06 AM

[Moon Kil Woong:]

There is still Microcenter, Central Computers, Frys, J&R, Radio Shack (although they are far from real competition), etc. And I wouldn't classify Wal-Mart as a electronics superstore.

The business model is too good for it to burn down to a monopoly or oligopoly. Buy stuff at a 50% discount payable 90 days in the future with returns to the manufacturer whenever you want for any reason. Then sell it all before you have to pay. If not return it. In fact, it is so good bad management thinks it's a great way to keep no buffer cash and siphon off the money into their bank account.

Thus like most businesses, management destroys the company with short sighted greed. Then moves on to be boards of other companies. They don't miss killing the company for a quick buck at all.

Lastly, more and more savvy people buy more and more stuff online. So if anyone kills brick and mortar blame the Internet and the efficiency that comes with it.

Jan 17 12:29 PM

[phil'spal:]

constructe:

as right as you are about management greed, i wish you were right about the 50% margins! big tickets are nowhere near that, and the terms arent nearly as forgiving as that. suppliers will eat you alive if you let them. it's a tough racket, and dummies don't last forever. (refer to headline. i rest my case)

Jan 17 12:46 PM

[chphoto:]

To tell you the truth I could see this comming years ago as soon as Best Buy opened I quickly became a better fan of Best Buy than Circuit City for number of reasons. One there locations were easier to get to. Also they had a better selection of Music, Movies and TV and Computer Equiment and also Best Buy has better price if you dont bealive me go look. You can get a new release movei for 19.99 at Best Buy go to Circuite City and you will see the same movie for $23 or more. If you dont bealive me go see for yourself like I said. Also Circuite City has a very slim selection on there different products and the prices are to high so if you ask me its long over due

Jan 17 02:06 PM

[Trinitymaster:]

Circuit City's closing only helps Wal-Mart. CC's liquidation is just further proof that people are tired of paying too much for products produced by slave-labor in a communist country.

Best Buy should be renamed "Better be high". Which you have to be when you pay 10% more for a product than if you drove down the road to Wal-Mart.

Wal-Mart will price match anyone, they have their own credit card, and they usually have a comparable selection to Best Buy.

Best Buy will only gain market share if they can convince a couple of major brands to sell exclusively to them.

Me? I'd like to see Wal-Mart lose market share so that I could open up a general store in my small town. Unfortunately, that is not going to happen.

Best Buy is history. Many times I've said buy puts and wait. However that strategy has almost destroyed me as people tend to do everything they can to pump Best Buy's stock price to artificially high levels.

They will file bankruptcy, but they'll be sneaky about it. The stock will be in the 20's, all of their executives will exercise their options (and then sell the stock), and then they'll "unexpectedly" file for bankruptcy protection.

Jan 17 09:25 PM