Best Buy Isn't This Week's J.C. Penney

A troubled retailer stuns the market with blowout quarterly results on Thursday. The stock rallies. That was J.C. Penney (NYSE: JCP  ) last week. Can Best Buy (NYSE: BBY  ) offer up a repeat performance tomorrow morning?

Few expected J.C. Penney to post a narrower quarterly loss than Wall Street was targeting, and even fewer expected the struggling department store operator to check in with a 6.2% spike in comps. However, that potent combination was enough to send the shares 16% higher on Friday. When a stock is out of favor, even the mere whiff of something good can send short-sellers scrambling. 

J.C. Penney isn't perfect. In fact, the stock has given back most of Friday's gains through the first three trading days of this week. It's easy to be skeptical about J.C. Penney since comps during the same fiscal first quarter slumped 16.6% the year before and 20.1% the year before that. Work the math and even with this quarter's 6.2% uptick, we're talking about a company where the average store is selling 29.9% less than it was three years ago. And just so we're clear here: J.C. Penney wasn't happy with those results at the time, either, so it's gone on to make two CEO changes since then. 

Best Buy's store-level sales performance hasn't disintegrated as badly as we've seen at J.C. Penney. Margins are what's crushing Best Buy as it struggles to keep prices low enough to keep smartphone-tethered window-shoppers from defecting to better online deals elsewhere. It's not an easy problem to fix. Wall Street sees fiscal first-quarter sales sliding just 2% to $9.2 billion in tomorrow's report, but with earnings per share belly-flopping 38% to $0.20. Best Buy's been beating pessimistic analyst profit estimates by a wide margin over the past year, so a modest beat wouldn't be much of a surprise. However, it would be a miracle if Best Buy didn't post a sharp drop in earnings on flattish sales.  

It can happen, of course. J.C. Penney shocked the world last week. The problem here is that Best Buy and J.C. Penney were passing ships last year. They may both be chains that peaked in popularity a couple of years ago, but we saw J.C. Penney shares plunge 54% last year while Best Buy's stock soared 237%. The consumer electronics retailer was one of the market's biggest winners despite ultimately turning in a fiscal year in which revenue, comps, adjusted earnings, and operating margins all ticked lower. The stock has taken a beating this year -- and that may help if the report isn't exactly dreadful -- but investors were already burned by the "Renew Blue" turnaround that has yet to materialize. 

There's going to be a lot of pressure on Best Buy tomorrow. It'd better pull a J.C. Penney out of its hat.

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