Best Buy Must Do More Than Survive

 | Jan 21, 2014 | 9:30 AM EST  | Comments
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bby

,

hgg

Wall Street analysts loved Best Buy (BBY) into the holiday numbers. Following a 36% kaboom in the stock price last week after less-than-stellar holiday same-store sales and look-away, train-wreck margins, should you love it now?

Here is the dilemma. Best Buy is not going away, as it is basically the only pure play game in town, excluding hhgregg (HGG) (which has plans to go national). Failing to disappear in 2013 was simply enough to catapult the stock up more than 200%.  But 2014 is going to have to deliver much more than just survival for BBY to return significant gains, even at last week's selloff levels. 

Here is why I would not get involved just yet:

  1. CEO Hubert Joly seemed to be separating himself from reality on the last-minute holiday sales conference call. Case in point, calling tragic margins/disappointing sales as a "speed bump." I described it as less speed bump, more road kill last week on CNBC. Why in the world would we believe the promotional environment is going to change anytime soon, never mind next year's holiday season?
  2. Best Buy prepared us for table stakes in Q4. We knew the company was going to defend market share at the expense of margins. But bottom-basement promos did not drive sales in line with expectations. That says a lot about just how bad the category is getting battered.
  3. We are reminded of the race-to-the-bottom promotions, which resulted in the ongoing race-to-the-bottom margins. While BBY management believes we should not read into this quarter, I believe guidance for 2014 will suggest otherwise. Watch out for the earnings estimates chopping block, not to mention downgrades.
  4. The bright spot appliance category, which was up 17% this quarter, is still too small to make a meaningful difference for BBY. Plus, have we seen the best of the home upgrade buying spree as interest rates start to rise?

Best Buy was the darling of 2013, but most likely for short-term reasons. We have to give credit where credit is due to a new management that reversed terrible execution issues from previous managers. But a cost-cutting story is not going to cut it in 2014.

Sales and margins have to be the next leg of the story and that seems unlikely near term. If you want a best buy, wait for bargain-basement guidance.

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