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Best Buy (BBY)
Best Buy Revises Annual Forecast; Expects Lower Profits
Less than two months after upbeat December sales prompted company executives to up the ante on 2008 earnings, Richfield, MN-based Best Buy has had to sheepishly take it all back. The company announced profits in its fourth quarter, which includes December, will not be as robust as expected, and that 2008 probably won't meet expectations either. The news did not make investors happy, what with the rosy predictions in December and the reiteration made in January. With the economy taking on water and consumers keeping a tight grip on their wallets, Best Buy could be in for a rough year. Does the company have any tricks up its sleeves, or will it take its punches lying down?
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While investors eye the markets for signs of recession, most consumers are eyeing their credit card bills and mortgage payments. Dearer credit and uncertainty about employment would be expected to keep many consumers out of Best Buy's stores, but from a relatively upbeat January retail sales report economists have to be scratching their heads. American consumers have long been referred to as "resilient" when it comes to shopping, and consumption is by far the largest component of the country's GDP.
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The major hurdle for Best Buy is that the price of food and clothing pales in comparison to the price of a flat screen HD television or a digital camera. This fact is the primary reason that the company reduced its 2008 guidance and indicated that fourth quarter profits would not be as high as previously expected. Less than two months after a partially upbeat holiday shopping season (sales rose 1.5% in December), the company is expecting the January downturn to force earnings per share to $3.05-3.10 from $3.10-3.20. Analysts were expected EPS at $3.17. Uncertainty about the economy for the rest of the year prompted a reduction in the sales growth percentage from 4% to a reduced 2.5-3%. The announcement was especially telling, since the company upped its 2008 guidance in December and reiterated in mid-January.
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News of the revision sent shares of Best Buy down nearly 4% in Friday morning trading. Investors see the company in a tenuous position, since its profitability is closely correlated with the strength of the economy. Even if company executives feel "optimistic" about the electronics retail industry, a decline in sales is a decline in sales. The company is planning to expand more internationally in the coming years, which could spread out its reliance on the U.S. economy. A planned 160 stores will open abroad in from now until 2009, though how successful those stores are will depend on continued economic growth in hot markets like China. If the U.S. economy does fall into a recession the world markets will probably feel a ripple effect, reducing available money for electronic purchases.
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After meteoric growth in the late 1990s and the early part of this decade things have slowed down considerable for Best Buy. Shares have slowly declined from $50, but have dropped 16% so far in 2008. Best Buy's competitors have already felt the effects of credit worries and a cooling economy. Shares of Circuit City (CC: Charts, News, Offers) have declined nearly 80% in the last year compared to Best Buy's decline of 12%. Radio Shack (RSH: Charts, News, Offers), while not competing at the same level, has seen its shares fall by 20%.
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