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.
Now that we have made it through another holiday shopping season, and earnings season is starting, retailers are beginning to report fourth-quarter sales figures. Analysts are beginning to adjust their own expectations and post warnings to investors. During the past few weeks, we have seen a number of ratings changes take place, and poor same-store sales results being reported. Today, it was Best Buy's (BBY -0.62%) chance to disappoint investors, as it reported that U.S. same-store sales fell 0.9% during the holiday shopping season. This decline came at a time when Best Buy was heavily promoting items and offering major discounts to help drive traffic to its stores. From the beginning of November to January 5, the electronic store's U.S. sales came in at $9.75 billion, while international sales hit $1.7 billion -- figures that are 1.5% and 0.8% lower, respectively, than they were during the same time frame last year.
Best Buy was a killer stock to own in 2013, as shares rose 237% on the hope that the company's turnaround strategy would work. For years, Wal-Mart and Amazon.com were killing the company, because Best Buy could not compete on price. A better online presence, new store layouts, and better customer service were supposed to help Best Buy stop the bleeding, but this report makes it seem like there isn't much the company can do at this point. Once customers find something better, it takes a very convincing proposition -- and time -- to get them to change their habits again, and Best Buy may not have that kind of time, or be able to provide a good enough overall experience. Shares of Best Buy were pummeled today, as they closed down 28.59%.
Another struggling retailer today, which is also in the middle of its own turnaround story, is J.C. Penney (JCPN.Q), which lost 1.57%. While the share price decline may not be that large, the reason the stock fell is a big deal. Yesterday, the company announced that it would be closing 33 locations, and thus laying off more than 2,000 workers.
The argument can be made that both healthy and sick businesses cut store counts and close locations when they're not performing well, but J.C. Penny is anything but healthy at this time. The company has been in the midst of a turnaround for a number of years, and has spent millions on changing the store layouts, the company's name, their customer, the brand, inventory, promotional adds, etc. You name it; J.C. Penney's has changed it. And the worst part is that none of it has worked up to this point. Now, the company is going to begin cutting its store count, and the size of its business opportunity will inevitably shrink. The good old days of J.C. Penney's are likely over. Anyone who owns this stock should consider the risks and the probability of making any money in the next few years from this investment.
Outside of the world of retail, one other company, which has been going through a really tough time for the past year, also experienced a miserable day today. Shares of the online video game maker Zynga (ZNGA) fell 12.16% this afternoon. The move lower came after an analyst at Sterne Agee released a report indicating that analysts are likely overestimating the company's fourth-quarter results, and Zynga will likely disappoint investors when it releases its first-quarter guidance. While Sterne Agee maintained its neutral rating on the stock, Arvind Bhatia, the Sterne Agee analyst, lowered his own estimates for bookings and EBITDA in the first quarter of 2014 from $137 million and minus $3.5 million down to $116 million and minus $17.2 million, respectively.
To me, analysts' opinions about next quarter's results are rather worthless; all I want to know is a how the company did in the past, and what the company's management believes will happen in the future. But this report makes me wonder why anyone would still own this company. In this case, Arvind Bhatia is basing his claims on industry checks, which is better than nothing. Most investors, however, should be able to conclude on their own that Zynga is struggling, as it just recently announced it would be shutting down one of its oldest titles, as it is surely no longer profitable. The problem, though, is that it still has numerous extremely loyal fans, and they are causing quite a stir about the game ending. Unless Zynga really needed to save money, it probably wouldn't shut down such an old game and risk alienating very loyal gamers, which is exactly what it has now done.
The future looks rather bleak for the company, and it's hard to see a strong enough catalyst that would convince me that owning the company would be a good idea.
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