Is Best Buy A Leading Indicator?

| About: Best Buy (BBY)

Consumer electronics retailer Best Buy (NYSE:BBY) dropped 6% on the open this morning after a weak earnings report and lowered guidance. Best Buy reported revenue of $11.35 billion, falling short of estimates for $11.5 billion. Net income of $0.47 per share fell well short of expectations for $0.52. The company also announced new guidance of $3.35 to $3.65 per share, which includes a $0.20 to $0.25 EPS increase due to the company's share buyback program. Old guidance called for $3.30 to $3.55 per share. The important question here remains, is this a company specific problem, or an indication of the entire US economy?

Read the full earnings call transcript

Let's first look at the reasons for the bad report. Same store sales were down 2.8% for the period, although US numbers were better than international (-2.7% vs. -3.2%). Gross Profit declined 2%, as US declines were not offset by international gains. Operating income fell 30% as SGA expenses rose, most of which was increased advertising.

Best Buy CEO Brian Dunn made the following comment:

While results in the second quarter and our outlook reflect continued macro challenges to overall consumer spending and lower consumer electronics industry sales, we have made good progress on our key strategic focus areas in this environment. Looking forward to the important holiday season, I believe Best Buy is well positioned to bring the benefits of our multi-channel model to our customers and shareholders.

This speaks to the weakness of the global economy, and it could be getting even worse. According to, the average retail price of regular gasoline today is $3.655, up 92 cents from one year ago. That's a 34% increase. Consumers will not have as much money to spend this year, and Best Buy will be one of the first to be hit. Why would I go to a Best Buy, where it will cost me to travel there plus I have to pay sales tax, when I can buy the same product off Amazon (NASDAQ:AMZN), usually for a better price as well. Best Buy will have to be even more competitive to get sales this season, which will mean lower prices and higher advertising costs. I think you can take another percentage point off their margin estimates for the year.

In the end, I don't think this is a company specific problem. It's an economic slowdown problem. With gas prices higher, it will be interesting to see how crowded the malls are this holiday season. And especially with the recent flooding problems and aftermath of Hurricane Irene, people on the east coast will be buying necessities for now before more electronics. Clothes are more important than replacing the 5th DVD player you have in your house. And with the way things look going forward in this economy, children just may not be getting their 22nd video game. I think Best Buy is a good company, but right now it faces serious economic headwinds.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.