Best Buy 'Hopes' for Hot Products

 | Aug 26, 2014 | 10:12 AM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

bby

,

amzn

Listening to the Best Buy (BBY) call and reading though their earnings release, I just keep thinking to myself: Something's gotta give.

The company's tone on the call was extremely optimistic and, notably, not defensive.

But the challenges appear so obvious and, more troubling, they are tied to a hot product cycle. Chief Financial Officer Sharon McCollam all but acknowledged that when she was asked about her forecast for negative single-digit comparable-store sales for the fourth quarter.

Responding to one analyst, she said: "The fact that the innovation in mobile has been pretty soft this year was different than we had hoped." Had hoped!

That's it, in a nutshell, with this important overlay: Competition from Amazon (AMZN), and Best Buy's own shift to online, continues to drive margins lower.

Best Buy itself says that traffic to bricks-and-mortar continues to decline as consumers shift online. Yet online comparable-store sales, up an impressive 22%, grew at a lower rate vs. the 29% rise seen in the prior quarter, and the 25% the quarter before that. Still, the 22% read was well above figures recorded a year earlier.

On the bright side: Best Buy is rapidly adapting to the current environment, notably in its ship-from-the-store service. As one industry friend notes:

"Remember, they are still doing almost $40 billion a year in a 40,000 square-foot box -- or right at $1,000 per square foot. And that is with a lot of dead space in the middle of the Store. Hhgregg (HGG) is doing under $10 billion a year in a 30,000 square-foot box -- that is trouble."

Less bright: Margins continue to fall, as do costs, as the company struggles to beat Amazon at its own game. In the end, it's about costs. If the company can get the costs right, it has a chance. And one good product cycle will make Wall Street forget, at least temporarily, how precarious Best Buy's high-wire act really is.

But hoping for hot products isn't a good model. It's totally out of the company's control. Yeah, something's gotta give -- it's just unclear what that will be, and when it will happen.

Columnist Conversations

Busy day in the VIX pit on the last day to trade the October contract. 725,000 puts and calls traded on the in...
Here are the hurdles GS needs to clear if the rally is going to continue from the time/price support. (180.43-...
Very nice day in the market today as earnings results are largely coming in better than expected. Both S&...
Ok so we saw a low at the confluence of timing cycles...BUT heads up, this area needs to be cleared or the ral...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.