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No Holiday Cheer for Best Buy (NYSE: BBY) as Online Retailers Steal the Joy

The highlight of the week before Christmas, from a stock market point of view, is always the third-quarter earnings report of electronics retailer Best Buy Co. Inc. (NYSE: BBY). It's a tradition almost as old as St. Nick, and since the mid-2000s usually covered in just as much red.

Back during the 1990s, BBY was the alpha dog of retail stocks. In a period of fantastic strength in tech stocks, BBY was every bit their equal, rising more than 1,000% from 1997 to 2000 by promoting the digital good life.

Those were the days, huh?

But as you could see in its report and guidance last Tuesday, the technology-driven big box retailer from Minneapolis is now just a shadow of its former self, disappointing again with a 5% decline in same-store sales and offering weak guidance. The saddest part was that the market didn't even care. Investors of other retailing stocks basically just averted their gaze.

The message for retailers is clearer than ever, and it is a message that all companies must heed: The age of the everything-for-everyone department store anchoring a mall is over.

This is the era of the "long tail" – a time when a store like Inc. (Nasdaq: AMZN) can truly shine because it has a cutting edge business model.

Any investors that took my recommendation to buy the First Trust DJ Internet exchange-traded fund (NYSE: FDN) own Amazon because it is the second-largest weighting in the fund. In a shopping season during which snow blankets the country and people have a hard time getting to malls, online retailers make even more strides vs. their terrestrial rivals. FDN has been pulling back a bit lately, and the $34 area could be a place to add it if you don't own already.

The holiday season so far has gotten off to a good start. About 212 million shippers visited stores and Web sites during Black Friday weekend (Thursday – Sunday), up 10% from 195 million shoppers in 2009. And the average shopper spent $365.34 this year, 6.4% higher than last year's $343.31, with total spending this Black Friday weekend estimated at $45 billion.

Consumer spending rose 0.8% month-over-month in November, which is very strong, but that included a 4% month-over-month rise in sales at gasoline stations, where I doubt many people were shopping.

A Tale of Three RetailersEven outside the convenience stores, though, and taking out auto sales as well, the standouts were clothing (+2.2%), leisure (+2.3%) and online (+2%). Furniture sales fell 0.5%, which does not surprise me, but the 0.6% decline in electronics sales did put a furrow in my brow.

Research consultancy firm Capital Economics says that even if sales growth turns out to be a little softer in December, annualized real consumption in the fourth quarter could hit 4%, up from 2.8% in the third quarter. And if the proposed payroll tax cut makes it into law, the analysts noted, consumption growth should even be a little stronger in the first quarter of 2011.

This kind of growth will be hard to maintain if job growth remains constrained because real income (wage growth minus inflation) is trickling higher at less than 1% annualized.

My expectation is that this sort of environment really separates the winners from the losers, and favors discounters, so I still like the prospects of my two recommended discounters, Family Dollar Stores Inc. (NYSE: FDO) and Ross Stores (Nasdaq: ROST). They are not the most glamorous chains in the world, but their managements are focused, talented and experienced, and have treated shareholders well.

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