Best Buy's sales good for shoppers, terrible for stock

The retailer's shares tank as razor-thin margins result in a 13% profit drop.

By InvestorPlace Dec 13, 2011 11:24AM

Kyu Oh/Photodisc/GettyJeff Reeves


Best Buy (BBY) had high hopes for this holiday shopping season. Black Friday sales numbers hinted that Best Buy was a winner, going big on discounts and exclusive in-store deals after a rather lackluster showing last year.


After Tuesday's earnings report for the third quarter, however, Best Buy investors might be getting a lump of coal under the tree. The big-box electronics retailer saw profit slump 13%, predicted weak margins and stuck with its previously conservative sales forecast.


The result was a brutal 10% slide in Best Buy stock in early trading, and that might be only the beginning.


Here are the specifics on Best Buy: The retailer's fiscal-third-quarter profit fell 13% to 42 cents per share, or about $154 million. That sounds like a lot of money, but when you consider it made 54 cents per share, or $217 million, last year -- and that the company raked in higher sales revenue this time around -- you get a disturbing picture.


How can a company sell more but make less profit? Simple: It sacrifices margins just to move merchandise. That's exactly what Best Buy is doing this holiday season -- offering mega deals on electronics but making little profit. And that's after BBY slashed its seasonal work force by half to save on costs, hiring just 15,000 workers for the holidays.


The downward spiral of earnings is set to continue as margins remain meager for the foreseeable future. BBY said in its Tuesday earnings report that it expects profit margins to fall by about one half of a percentage point across the entire fiscal year of 2012. That's not encouraging. Don't expect a revenue boost either, as Best Buy predicted same-store sales to be flat at best and down 3% in a worst-case scenario for 2012.


This is a very disappointing development for investors. Obviously, those who thought Best Buy's earnings would be propped up by holiday sales were let down. However, other headlines have hinted that the rosy holiday retail outlook might have been premature for the entire sector. We learned this morning that retail sales rose less than expected in November as a drop in receipts for food and beverages offset stronger vehicle sales. When people cut back on food and drinks over Thanksgiving, you know there's trouble. Overall retail sales increased a paltry 0.2% during the month, according to the Commerce Department.


For Best Buy, the softness in retail and its ever-shrinking margins will continue to cause the stock to suffer. The Best Buy earnings miss could be only the beginning. But other retail investors need to take notice of this as a warning sign. The race to the bottom on prices this holiday season might entice shoppers, but it will not result in big profits for corporations selling goods at razor-thin margins.


And as November retail sales indicate, even the deal of the century isn't going to prompt an out-of-work family to splurge on a flat-screen TV.




Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.



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3Comments
Dec 13, 2011 12:26PM
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I do not understand how Best Buy has been sacrificing its margins when damned near every product is being sold at list price and the few items that are really on sale are very limited in stock.

 

I feel that Best Buy has limited choices and unless a person wants a TV, there is little reason to visit a Best Buy store.  The TV prices are not all that hot either.

Dec 13, 2011 12:37PM
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The stock market is a scam.  Proof read article.
Dec 13, 2011 2:04PM
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The problem is, All of these stores are not taking Costco seriously!

I will not shop at a store that does not price match Costco for one, Two, they need to be price matching Costco before I shop there.

NOTE TO BUSINESS COMMUNITY: If you think Costco is just a fly by night operation that will never affect you, YOUR WRONG..... AND YOU WILL FAIL IF YOU DO NOT COMPETE!!!

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