Is Best Buy The Worst Buy?

Last week there was doorbuster sale on big box gadget retailer Best Buy (BBY). The company lowered 2011 Q3 earnings guidance from $3.50 to $3.70 per share to $3.20 to $3.40 per share. Stock market voters went to the polls and BBY did about as well as House Democrats did in the November midterms. The share price has given back 10 bucks since Thanksgiving. What a bargain? Maybe not. Mostly, BBY’s problems now and going forward are related to the usual: competition from discounters, the economy, shrinking margins, etc. However, there’s also a larger cultural issue.

When the economy was a full tilt boogie and everyone was drinking champagne with hookers in a hot tub full of money on the deck of their McMansion, BBY was the shizzow. The plasma television was becoming democratized and you needed a big one (or three) to cover all of that McMansion wall space. BBY was the place to get one. Would you get a good deal? Probably not. In fact, there’re a couple of items in my house purchased from the Blue Shirts over the last decade that I’m sure I got hosed pretty good when I went through the checkout line especially the overpriced Johnny Quest box set (although my sons have gotten a lot of mileage out of it and you have to admit, it is the coolest cartoon EVER).

But when the economy was body slammed in 2008 by the financial crisis and the realisation that, like stock prices, house prices can also come down, consumers lost jobs, dug in and kept their powder dry. Things have improved somewhat and consumers are tiptoeing out to the store. However, the deals on boom time era, big ticket electronics are a little better. You can pick up a decent sized HDTV at Wal-Mart(WMT), Sam’s or Costco (COST) for between $300 to $400. That’s probably a third of what they cost four years ago. The big TV that accentuates Susan Lucci’s nose hair is no longer a status symbol. And when you’re in the business of selling something that used to be an overpriced status symbol, business won’t be that great going forward.

Whenever I get bummed about work, I remember that I’m not in the electronics retailing business and I feel better. Lounging on the sofa, I can swivel my head and count five electronic things that came from three different big box, electronic retailers that no longer exist and they weren’t bought out by a bigger company. Everyone explains away Circuit City’s failure to the usual factors: poor planning, over extension, financial mismanagement, bad leadership and I could go on. But I think it’s the model in general. The big box electronics store model is the same as when the console television with the built in record player was all the rage. Don’t argue. You know it’s true. The only difference is that the maroon, polyester blazers have been replaced with polo shirts.

But isn’t BBY more than HDTV? Sure. But tablets, phones, all that stuff is jumping the shark price wise. And while the Geek Squad was a kitschy, fun branding idea, your neighbour’s 23 year old kid who was laid off from the IT firm he worked for can do the same thing, if not better, for less with less paperwork and attitude.

Around April of this year, I read some good stuff on Dollar Tree (DLTR). Being a frequent user, I was familiar with the brand. BBY held the retail slot in our growth biased equity account. I bounced the idea off of my partner of switching into DLTR. We were sitting on a 27% gain on BBY and I like DLTR’s numbers better going forward. He’s the senior guy and responsible for the growth and technical strategies. I’m the junior guy responsible for value and income. I was a little out of my wheelhouse but I thought it was an OK idea. He vetoed it based on the chart at the time. I wish he hadn’t .DLTR has turned in 46% since then and, well we all know about BBY (although he did take partial profits prior to the drubbing). I will try not to get drunk at the Christmas party and rub it in.

Is BBY a deal? I don’t think so. Maybe as trade. A very quick trade with modest targets on either side. Would I buy DLTR here? Nope, at least not a full position and then, at best, maybe. If I absolutely had to add a retailer (probably better to do so after the first of the year) it would probably be Fred’s (FRED). More of an outlier and a helluva lot more defensive. Plus there’s a dividend. Despite the bad news, the majority of the rabble is still BBY bullish. I’ll bet they felt the same way about Circuit City at some point.

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