Leigh Drogen

About the Author Leigh Drogen

Leigh Drogen is the Founder and CEO of Estimize. Estimize is an open financial estimates platform which facilitates the aggregation of fundamental estimates from independent, buy-side, and sell-side analysts, along with those of industry experts, private investors and students. By sourcing estimates from a diverse community of individuals, Estimize provides both a more accurate and more representative view of expectations compared to sell side only data. Leigh started his career as a quant trader at Geller Capital, a White Plains, NY based fund where he ran strategies that looked at earnings acceleration and analyst estimate revision models, as well as price momentum and several sentiment indicators. Leigh later went on to be the founder of Surfview Capital, a New York based asset management firm that used many of the same strategies as Geller Capital, with a focus on higher beta names on an intermediate term time frame. His educational background includes focus in economics and international relations, specifically war theory. He is a graduate with honors from Hunter College in New York City. You can contact Leigh by emailing him at Leigh@estimize.com

4 Reasons Investors Are Jumping Ship On Best Buy

Best Buy (NYSE:BBY) put out a deftly titled press release this morning called “Best Buy Reports Increase in Holiday Revenue”. Ironically, the report divulges the retailer’s lackluster holiday period sales.

The title of the press release is true technically speaking, but Best Buy is well aware that these results are less than inspiring and the company has already started compiling a list of excuses.

Compared to last year, Best Buy’s holiday sales were up 2.09%. As a standalone statistic that number might be okay. What Best Buy tactfully chose not to disclose in this press release is that last year’s 4th quarter revenues were down 13% year over year. The 2014 holiday period is only slightly better than the disaster of 2013.

With that being said, expectations were never too high to begin with. Contributing analysts on Estimize were looking for just 2.12% revenue growth for the entire quarter(that would be a 2-year high, by the way). Best Buy’s report today revealed that the retailer was only a trivial distance behind the projected sales pace.

Although at first the sales number didn’t look too bad this morning, management listed 4 points of concern which have investors worried about the company’s bottom line.

1. Deflationary Pricing

This one’s straightforward. The first point was simply labeled “deflationary pricing”. Flat revenue with lower pricing means smaller margins and weaker earnings.

2. Weakening Industry Demand in the Consumer Electronic Category

The second listed concern is weak industry demand for consumer electronics. Consumer electronic goods sales make up about one third of Best Buy’s revenue, so any drop there could be devastating.

With online shopping electronic devices available just about anywhere, prices and margins are dropping at medium-sized and specialty retailers as giants like Wal-Mart (NYSE:WMT) and Amazon.com (NASDAQ:AMZN) race to the bottom on price.

Best Buy’s online sales were up 13.4% this quarter. With total revenue coming in close to flat that’s a fairly clear indication that margins will drop due to the higher costs associated with shipping. One of the few legs up that the brick and mortar stores still have over online retailers, is the opportunity to provide more profitable services which brings us to our third point.

3. Declining Services Revenue

This morning, Best Buy noted declining demand for product warranties. With the sheer number of devices being released, the average length of a product cycle appears to be decreasing. Another possible reason why consumers aren’t paying Best Buy insurance money is that producers are simply making more reliable devices. This holiday quarter Best Buy’s services made up 3% of total revenue, down from 4% last year (including the estimated benefit of mobile phone installment billing).

4. Exchange Rate Volatility

Fourth and finally, Best Buy listed exchange rate volatility as a pressure. This quarter Best Buy increased its domestic sales while international revenues fell. Given that the US dollar is so strong right now there’s a challenging environment for US based companies to do business overseas. This may have negatively impacted international demand.