Why Best Buy's Shares Shorted Out, Then Recovered

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of embattled electronics retailer Best Buy (NYSE: BBY  ) were looking like a best sell for much of the day; shares were down as much as 11% before recovering all the way to even.

So what: The woes continue for Best Buy. The latest disappointment was the company's second-quarter-earnings report. Thanks to store closures and other one-time costs, profit fell 90% for the quarter. Performance on an operating basis was better, but not by much, as operating income fell 52%. On the top line, a 3.2% decline in same-store sales drove a 3% drop in revenue.

Sufficiently depressed yet? There's more. Best Buy also suspended its full-year forecast and halted share buybacks. And all of this follows the company's hiring of new CEO Hubert Joly, which dimmed investors' hopes that it would cozy up to founder Richard Schulze's buyout hopes.

Now what: What's there really to take away here? Best Buy is struggling -- and struggling badly. If you ask this Fool, the woes of Best Buy reflect the thin competitive moat that the retailer had. Without any particularly compelling reason to shop at Best Buy stores, shoppers happily head to Wal-Mart (NYSE: WMT  ) or log onto Amazon (Nasdaq: AMZN  ) to score a lower price.

Could Joly, who has little in the way of retail experience, turn around Best Buy? It's possible, but he's going to have to lead a serious corporate soul-searching effort to help it figure out what the heck it can offer to customers that its competitors don't or can't. And I'll give you a hint: The answer ain't lower prices.

Of course, in light of all of this, you might ask why the stock recovered its losses today. What seems most likely is that investors see the poor performance of the recent quarter as nudging the door open a bit further for a Schulze takeover and a near-term push for the stock.

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The Motley Fool owns shares of and Best Buy. Motley Fool newsletter services have recommended buying shares of Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Wal-Mart, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

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  • Report this Comment On August 21, 2012, at 11:13 PM, AlphaBetaOmega wrote:


    I think you're right for now, but its only a matter of time before savvy investors realize that while Schulze might have more leverage with the BBY board, he's lost a lot of leverage with Private Equity.

    Q2 earnings were the first time any PE firms or Banks have had a chance to take a peek at BBY's current financial state. Based on the numbers, what PE firm or Bank would want a piece of the company? Its been in a perpetual state of decline for the past eight quarters (albeit in Q1 the company had an extra week, lower tax rate, and large buyback which masked the decline making it look like an earnings beat)..a decline that is quickly accelerating.

    An arbitrage play here is also iffy because the assets BBY owns have little to no value? Who is going to pay anything but pennies on the dollar for a defunct European and Chinese electronics consumer business that's in the toilet? The company all but told the world that the big box retail leases and buildings are worthless by making the move to the new retail format - how much do you think BBY can get for those if a PE chop shop comes in to sell it off?

    The higher debt, lower revenue, and lower FCF, make this a pretty scary situation. Not sure what PE firm would want to throw good money after bad.

    Fortunately for speculators, BBY's board and Schulze need to keep up the appearance that a Buyout is impending to give support to the stock price at this point.

    We'll see how long the house of cards stands...

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