Best Buy Investors Should've Seen This Coming

Best Buy plunges on a blue Christmas.

Jan 16, 2014 at 12:43PM

Today's bloodbath in Best Buy (NYSE:BBY) could've been avoided if the market had merely paid attention.

Best Buy posted negative comps during holiday shopping season, and the language of the company's promotional nature to woo shoppers suggests that profitability's taking a hit for the quarter. Why were investors holding out for positive comps? Why were investors holding out for earnings growth? Why were investors holding out for both? It was never going to be possible to succeed on both levels, but now it seems as if Best Buy is failing on both.

There were two big red flags pointing to this morning's Best Buy update as the Red Wedding of the consumer electronics universe.

The first warning sign came last week when all of the publicly traded consumer electronics retailers fell sharply last week after a smaller rival posted horrendous results. Four prolific consumer electronics specialists saw their stocks tumble between 7% and 22% after hhgregg (NYSE:HGG) warned of double-digit declines in its consumer electronics, PC, and wireless categories. Best Buy was the relative winner of the lot, only down 7%. 

How could things have ended well for Best Buy after that? As small as hhgregg may be, it was clear that Best Buy only had a shot at either firm comps or earnings growth. You weren't going to sell unless you were discounting aggressively, and slashing prices or matching competitor prices would gnaw on gross margins. 

Then we saw GameStop (NYSE:GME) reveal the other warning sign. GameStop shares took a hit after hosing down its profit outlook for the quarter. Digging deeper into GameStop's carnage, we saw that it had no problem selling low-margin Xbox One and PS4 consoles. New hardware sales nearly doubled during the period. However, no one was buying the high-margin games that GameStop and Best Buy needed to make the next-gen console revolution pay off this season. GameStop's new software sales plunged 22.5%, resulting in a larger-than-expected decline in quarterly earnings despite the top-line improvement.  

Best Buy shares did inch lower when both of these events took place, but they should've fallen even harder. GameStop was offering Best Buy cheat codes that went unheeded, just as hhgregg's hit was dismissed as friendly fire.  

Today was obvious to anyone paying attention, and I'm not the only one who was saying it.

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Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of GameStop. 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. The Motley Fool has a disclosure policy.

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