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Greenberg: Why Best Buy is in Economy's Crosshairs

Thursday, 12 Aug 2010 | 4:01 PM ET

Stock surprise: Best Buy's resilience on a day everything else is down.

AP

The reason for my surprise: Given events in recent days, you can’t help but wonder whether Best Buy can avoid cutting its full-year guidance, which would not appear to bode well for its stock.

A quarter ago, in June, the company reaffirmed full-year guidance after missing estimates by a big (for Best Buy) margin.

Granted, the stock took a tumble in recent days, sliding around 6 percent in the two days since Goldman Sachs downgraded Best Buy on concerns of slowing TV sales. And it’s down considerably from its May high of around $548.

But, still—it was up on a day Cisco got pummeled after mentioning the "mixed" message it's getting from its customers.

And it was up in the wake of numerous reports from various Wall Street firms that PC demand appears to be taking a dive.

On top of that: Kohl's was out today saying that it sees "a cautious consumer."

Why care? Several reasons:

When it reaffirmed its full-year guidance, CEO Brian Dunn said, "Consumer spending has been episodic and it appears that our customers are operating on queues from the broader environment.”

Since then, episodic appears to have morphed into a full-blown pullback. As I’ve written here and uttered on-air numerous times during the most recent earnings season, companies such as Kohl's , Cisco, Procter & Gamble and Colgate Palmolive have implied their customers are buying what they need, not what they want. Aside from Apple’s iPads, which appear to currently be economically indiscriminate, this would on the face of it have an impact on Best Buy.

PCs and TVs combined, according to Goldman, represent around 40 percent of Best Buy’s sales. As I noted above and have been babbling about on-air in recent days and weeks, both segments appear to have hit a wall.

PCs, which are 22 precent of revenue, are so important enough that on its first quarter earnings call in June, Executive Vice-President Mike Vitelli said, “As the back-to-school launch happens, which is coming up—that’s the next big drive that comes from us—we believe we're going to see the computer area continue to expand over the course of the year.” (Easy to say when the weak consumer is merely “episodic.”)

As flat-screen TVs become commodities, anything short of a wholesale rush to 3-D TVs (unlikely in a need/want environment) is likely to cause consumers to shop on price. This could cause tremendous competition for Best Buy’s Insignia private label brand.

All of which gets us back to the question: Can Best Buy avoid lowering guidance? If so, how long? We’ll know soon enough.

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