This is going to be an important week for three of retail’s biggest laggards.
It’s not supposed to be pretty.
RadioShack is eyeing its fourth consecutive quarterly deficit when it reports tomorrow, and the market doesn’t know if the strip mall chain will ever turn a profit again. The shift from traditional consumer electronics to an emphasis on smartphones has crushed margins.
Barnes & Noble is only rallying today on buyout news. The company itself is a mess, and analysts see a sharp decline in profitability as net sales dip slightly when it reports on Thursday.
Best Buy, by comparison, is a brazen beauty.
Analysts see a 38% plunge in profitability on a 2% decline in net sales. Best Buy may have eased investors fears last month by announcing flat holiday sales, but the company’s appliance chain in China is sputtering and January probably wasn’t a treat given the end of the 2% payroll tax stimulus plan.
However, Best Buy’s in a good groove these days. The stock has been one of the bigger winners of 2013, up a healthy 44% so far this year.
The market’s wondering if disappointed founder Richard Schulze may be making another play for the struggling retailer, and the market even applauded the store operator’s move to price-match Amazon.com, Inc. (NASDAQ:AMZN) — and a handful of other online retailers — all year round starting next Sunday.
The move to beef up Best Buy’s Low Price Guarantee is interesting. The chain is calling this end of “showrooming,” but it may very well be the end of margin expansion. Matching Amazon.com and 18 other online retailers will result in Best Buy selling at prices that may be unrealistic for a brick-and-mortar chain to support given its cost structures.
As more customers use their smartphones to pull up prices — and the lines at customer service grow longer — it won’t come as a surprise to see earnings continue to head lower despite any growth in net sales.
We could get a glimpse of that on Thursday when Best Buy reports. The superstore operator decided to test out matching Amazon pricing during the holidays. One could argue that it wouldn’t have made the policy permanent if it was snuffing out profits in the process, but it’s hard to see this having a positive impact on the bottom line. This isn’t the kind of stuff that it can merely make up for in volume if it’s selling some items at a loss.
Another reason Best Buy’s profitability is likely to slip is that analysts have overestimated the chain’s earnings power in the two previous quarters. It’s an unwelcome trend until that’s reversed.
Hitting the register
I closed out my winning bearish CAPScall on Best Buy last week, but I am still concerned about the possibilities of a grim quarterly report this week.
The article 1 Thing That Can Kill Best Buy originally appeared on Fool.com and is written by Rick Aristotle Munarriz.
Longtime Fool contributor Rick Aristotle Munarriz has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and RadioShack. The Motley Fool is short RadioShack.
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