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With the blaring cacophony of football commentators and animated characters screaming through roaring speakers, nothing quite matches a consumer-electronics store for sheer sensory overload. Lately, however, another sound has been added to the mix: crickets.
When I entered my local Best Buy (NYSE: BBY ) store last weekend, the place was eerie for its emptiness, as those scores of giant televisions performed without an audience. Anecdotal observations aside, though, I think Best Buy is about the worst buy I can think of for 2009.
Shares of Best Buy have surged by more than 70% since hitting a multiyear low in November, bolstered by the collapse of its former rival Circuit City. Under normal circumstances, the presumed increase in market share might make such a share recovery appear rational, but circumstances are about as far from normal as they've ever been. As disheartening economic data and massive layoffs continue to file in, I believe it's clear that any company relying heavily on consumer-discretionary spending will face severe challenges in 2009.
Let's face it, Fools. With a paltry savings rate in the years leading up to the present crisis, the American consumer floated a lifestyle that was heavily dependent on credit, so it stands to reason that declining availability of credit would force a behavioral shift in the consumer culture. Consumer spending, representing 70% of U.S. GDP, is falling at the fastest rate ever recorded. Consumer confidence is becoming an oxymoron. Even after noting a 10% contraction in spending by customers during the last three months of 2008, American Express (NYSE: AXP ) anticipates further spending declines and increased defaults during 2009.
Already, recent data shows that this behavioral shift by consumers is affecting the electronics sector acutely. According to one report, total spending on appliances and electronics plummeted by more than 20% between Nov. 30 and Jan. 3. A weaker outlook for computer sales no doubt influenced Microsoft (Nasdaq: MSFT ) 's decision to trim 5,000 jobs. Corning (NYSE: GLW ) has just announced 4,900 job cuts as demand for liquid crystal displays has shattered. Unfortunately, things are not looking much better over in Europe, where electronics manufacturer Koninklijke Philips Electronics (NYSE: PHG ) will let 6,000 employees go over the coming months.
Evidence is mounting for pronounced consumer-related weakness throughout diverse product types, from big-ticket icons like General Motors (NYSE: GM ) to smaller-ticket manufacturers like headset maker Plantronics (NYSE: PLT ) . Widespread layoffs and dismal earnings results reflect a consumer who's just as unwilling to spend as the banks are unwilling to lend.
Back to (not so) Best Buy
While reporting a 77% decline in net earnings for the third quarter of fiscal 2009 last month, Best Buy CEO Brad Anderson conceded that the outlook for consumer electronics continues to darken. Alluding to the sort of cultural shift among consumers that I believe will become a topic of much discussion in the months ahead, he stated: "We can foresee a period in which consumers may significantly shift their spending behaviors, which could have a dramatic impact on retailing." Indeed, one analyst has characterized the entire consumer-electronics sector as "fragile" and even questioned whether Best Buy will be able to survive as an "enduring franchise."
While I will stop short of predicting that Best Buy will follow the bankruptcy trail that its former rival blazed, I believe we have entered into sufficiently tenuous times for electronics retailers that Best Buy is certainly not a best buy in my book. Should the outlook continue to deteriorate, the company's total debt of more than $3 billion could weigh as heavily as a 50-inch plasma TV on the back of a debt-ridden consumer.
Not prone to ignoring red flags, the talented investors at Motley Fool CAPS have granted only two stars out of five to Best Buy. Nonetheless, more than 2,500 members continue to pick Best Buy to outperform the S&P 500, and I know they'd like to learn your opinion. Whatever your take on Best Buy, I hope you'll join the free CAPS community today and share your views with the rest of Fooldom.