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.