Best Buy has multiple problems that may be unsolvable. Physical music CDs used to drive customer traffic. That is gone forever due to downloads. New movie releases on DVD were good for store traffic. That is lessening significantly due to video streaming. The bigger problem is now the practice of "show rooming." That’s what happens when potential customers check out Best Buy’s physical merchandise while getting all their questions answered by Best Buy employees. They then go online to buy the item chosen at the lowest possible price. BBY really has no defense against this.
Multi-year lease obligations for large square-footage bricks-and-mortar stores are now weighing on BBY just as they did on the now-bankrupt bookseller Borders. BBY’s first-half EPS from continuing operations were down 49%. It’s not looking optimistic for the upcoming key holiday season.
The local consumer electronics business is probably permanently impaired. I am not tempted to own BBY shares as they represent a declining business that may not recover.
Office supply giant Staples saw its first half EPS down just 4%. The second quarter was worse due to European weakness which will not be a permanent problem. North American delivery business was up 0.5% in the six months. North American retail sales were down just 1.4%.
International operations were off by 13.2% but that segment constituted only 20% of worldwide revenues.
Staples is widely covered by analysts. Here are the consensus views of 15 to 16 of them regarding EPS for the fiscal years ending January 2013 and 2014.
SPLS earned $1.37 per share in FY 2011. Is a flattish year a disaster that should send a stock down 50%? SPLS closed Friday at $11.64. It peaked at $22.60 to $27.69 during each of the seven calendar years from 2004 through 2011. SPLS's 2012 year-to-date high is $16.93.
This is what S&P has to say about SPLS.
Value Line rates Staples as A+ for financial strength and gives them a 95th percentile ranking for earnings predictability (100th being best).
Staples is a great business suffering a temporary lull in growth due to slow economic times. It is not likely to be a permanent deterioration. At 8.5x this year’s estimate and with a 3.78% dividend I’m a willing buyer and owner of SPLS.
Disclosure: Long SPLS shares
About the author: