Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Stocks fell for a second consecutive day on Tuesday, with the S&P 500 falling 0.2%. The narrower, price-weighted Dow Jones Industrial Average (DJINDICES:^DJI) fared better, falling less than 0.1%, buoyed partially by Home Depot, which announced solid third-quarter results this morning. And speaking of retail ...
The knives are out this holiday season, and I'm not talking about carving turkey, as retailers are gearing up for what looks like one of the most aggressive wars for consumer dollars in some years. Best Buy (NYSE:BBY) already shed blood in the stock market today, as the shares fell 11% on the back of an earnings call in which executives declared themselves ready to sacrifice profitability to be price-competitive. The goal? "Winning the holiday season," according to CEO Hubert Joly. Apparently, the market thinks that would be nothing more than a Pyrrhic victory.
This ought to give you some idea of the ferocity of the competition: Today, Wal-Mart Stores (NYSE:HD) announced another component of its own scorched-earth holiday campaign, saying it will match the Black Friday deals at Best Buy, Target, and Toys R Us on select products -- a week ahead of time!
Undeterred, Joly said this morning:
Our market -- our overall market share, even though we are by far the leader in the space, is only in the mid-teens. So we don't think it's illegal, immoral, unethical to grow market share.
That reminds me of a quote from another chief executive, Berkshire Hathaway's Warren Buffett, who wrote in his 1992 annual letter to shareholders:
Consciously paying more for a stock than its calculated value -- in the hope that it can soon be sold for a still-higher price -- should be labeled speculation (which is neither illegal, immoral, nor -- in our view -- financially fattening).
It's all well and good to pursue market share, but will it fatten the company's -- and, ultimately, shareholders' -- wallets? The market share you pursue must be profitable, either immediately or on a present value basis (i.e., you may choose to fight market share that is initially unprofitable with the expectation that you will keep it and that it will eventually become profitable).
The trouble is, it's not clear that Best Buy is best adapted to winning that type of battle -- not against low-cost juggernauts such as Wal-Mart and, even more so, Amazon.com (NASDAQ:AMZN), which sees low margins as a source of competitive advantage. In a Harvard Business Review interview published at the start of the year, Amazon CEO Jeff Bezos said:
Percentage margins are not one of the things we are seeking to optimize. It's the absolute dollar free cash flow per share that you want to maximize. If you can do that by lowering margins, we would do that. Free cash flow, that's something investors can spend.
Right now, the market supports Bezos' long-term vision and strategy -- to the tune of a stratospheric 162 price-to-forward earnings multiple -- but investors are not as accepting with Best Buy, which has a more traditional retail footprint and a smaller potential market. Best Buy shares have had a fabulous run this year, as the company came back from what looked like near-death – they're up 233% even after today's rout. However, that recovery rally may have ended today; Best Buy has survived, all right, but thriving in this environment -- and achieving further stock gains -- is a different matter altogether.