Best Buy Earnings: Competition, Fickle Buyers Could Challenge Results

Your family and friends may be loading up on Fitbits and Beats by Dr. Dre headphones, but where are they buying? Sales at bricks-and-mortar electronics stores are falling, down 4% on a year-over-year basis, according to the Commerce Department. Among the largely traditional stores stands Best Buy BBY, and its competitive slugfest sets the tone for its Q3 earnings release in the pre-market on Thursday.

It’s been a mixed bag for retail during this earnings round, with big-name department stores Macy’s M and Nordstrom JWN disappointing Wall Street and Target TGT and Wal-Mart Stores WMT offering a few upside surprises this week.

And for BBY? Analysts reporting to Thomson Reuters are forecasting a per-share profit, on average, of $0.35, up from the year-ago comparable. Revenue is pegged at $8.88 billion, down from the $9.4 billion reported a year earlier.

Tough Climate?
RBC Capital Markets analyst Scot Ciccarelli downgraded Best Buy shares (figure 1) this week and said he’s not convinced the chain has the formula figured out in a challenging space. In a report, Ciccarelli points to “what appear to be deteriorating sales trends in the consumer electronics (CE) channel.”

But he also notes his “caution may be misplaced” amid BBY’s turnaround. BBY, he says, has been growing market share over rival electronics bricks-and-mortar retailers and has bettered its position over some online rivals through price-matching programs.

Wedbush analyst Michael Pachter argues that BBY is turning some of its attention to “developing its appliance category and aggressively expanding” its store-within-a-store concept for higher-end appliances. That potentially sets up BBY to take advantage of an improving housing market, analysts note.

This high level of volatility is behind put option trades that are drawing six times their normal volume. Trading activity is notable for the Nov 30½ put options that expire on Friday. Call activity has been relatively mute in recent sessions after a jump in open interest on call options near 34 and 35 a few weeks ago.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.