December 4, 2008 1:59PM
Best Buy Bull Case: Tweeter Gone, Circuit City in Chapter 11
Best Buy (BBY) may turn out to be just that in the retailing sector.
Sure, the Minneapolis-based electronics vendor has seen some of the troubles facing other retailers. Sales and the stock are falling as consumers slow their spending, especially on pricey electronics. But the long-term outlook for Best Buy looks more rosy as one of its competitors shut its doors yesterday and another is in bankruptcy reorganization.
It’s biggest electronics retail competitor, Circuit City, filed for chapter 11 bankruptcy protection on November 10th. The company has secured financing to keep operating under reorganization, but as the CEO of General Motors has referenced, Americans generally do not like to buy big ticket items, especially when there is a warranty involved. Time will tell if that holds true with Circuit City’s sales.
Another Best Buy competitor, Tweeter, went under yesterday. The company decided against chapter 11 and trying to restructure it’s balance sheet, instead choosing to simply close its doors and lay off its entire staff. Even Tweeter’s website seems to already be down.
One competitor gone, another trying to reorganize. From Marketwatch.com:
“This is a major positive” for Best Buy (BBY), Wal-Mart (WMT), Costco(COST) and others, Credit Suisse analyst Gary Balter said in a note. “We have not seen a consumer electronic retailer successfully reorganize in Chapter 11 in our 24 years in this space. Should (Circuit City) ultimately close all of its operations, we assume there’s roughly $10.5 billion of annual domestic sales up for grabs. Best Buy should take a disproportionate share of that business.”
The big risk to Best Buy, as it is to all retailers now, is Wal-Mart. The Bentonville giant is taking share across numerous product lines and electronics are no exception. Same store sales rose 3.5% in November. This increased competiton has Pali Research analyst Stacey Widlitz concerned (subscription required):
The competitive pressure on Best Buy will only heat up – and it should have real effects on comps and margins. WMT has said that they will announce more rollbacks in electronics on Saturday and next week. We expect that Best Buy will have to lower their prices in response, putting further pressure on margins. As a reminder, Best Buy is price protected against price declines at the manufacturer’s level, but not against the moves of their competitors. We also expect BBY to get more promotional throughout December, as they will need to clear excess inventory due to greater than anticipated sales weakness.
She recommends avoiding Best Buy shares.
Wal-Mart, along with online retailers such as Amazon.com and others, will pick up some of the slack from Tweeter’s demise and the negative press around Circuit City. Best Buy should as well. High-end electronics are a hands-on purchase for most. Shoppers want to see and visually compare the 50″ flat panel and laptops they buy. Moreover, even with the overall downturn in consumer spending, electronics are only becoming more common in our lives. No longer are computers and cell phones “discretionary” for most; they have become core holdings, part of our lives. And there is always going to be a part of the population for whom shopping at Wal-Mart is simply not available, convenient or desired.
There is a Best Buy, a Circuit City and (until yesterday) a Tweeter all within five miles of my home. Three has become two, and as history has shown it is not kind to retailers entering chapter 11, possibly just one. That could be a big win in certain markets for Best Buy.