More On Holiday Shopping

Best Buy (NYSE: BBY) came out with its latest retail results and they weren’t pretty:

NEW YORK (MarketWatch) — Boosted by U.S. holiday shoppers buying items from laptop computers to so-called smart phones, Best Buy Co. said Tuesday its third-quarter profit more than quadrupled as the retailer raised its forecast for the full fiscal year.

However, the stronger demand came at a price. Shares of the largest U.S. electronics chain (BBY) saw their biggest decline in more than a year, trading down 8.4% in late afternoon trading, as the company said strong sales of less profitable laptop computers and lower-priced flat-panel televisions are expected to lead to lower-than-expected fourth-quarter gross margin, a measure of profit that tracks percentage of sales left after minus the cost of goods sold.

Pressure from Wal-Mart (NYSE: WMT), Amazon.com (NASDAQ: AMZN) and Costco (NASDAQ: COST) were cited, and frankly I think there’s a lot to that. After all, we just got our new computer from Costco after we saw we could get a new computer with 25″ HDMI-ready monitor, 8GB of RAM and a 750GB hard drive for about $900. Anyone else would have charged over $1,000 for the same configuration, so we saved some money, for sure.

But to look at the sector, I’m starting to toy around with Google Domestic Trends and Google Insights for Search. The idea, according to Google, is that search engine activity would act as a ‘tell’ on sector performance. So I looked at Google’s Computers & Electronics Index here.

The normal index shows there was a spike at Black Friday, but has fallen since then. Looking at the historic data, we can expect to see the index pick up again the day after Christmas through the day after New Year’s when it should start its double black diamond descent.

But search activity is lower this year than it was last year, and last year’s was lower than it was in ’06 & ’07. If there are fewer searches for the item, it probably means there is less interest in it. And if search activity is a significant factor in sector analysis (some statistical experiments need to be run to test this), it leads me to believe the margin compression will mostly be coming from having too much inventory.

Best Buy’s margin story is one that is going to be commonplace as we move forward: overcapacity. They have too many stores, which are too big, that are carrying too much inventory.

And so the margins get cut, which pushes EPS lower. So from a fundamental analysis perspective, the stock most likely has one way to go and it isn’t going to be up.

Note: For the record, I had no positions (long or short) in any of the securities I mentioned in this post at the time I wrote this. This disclosure should’ve been in the original post, but that’s what I get for trying to publish things at midnight.

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Filed under finance, macro, Markets, Way Forward

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