Will Best Buy’s Earnings Miss Weigh on Wal-Mart?

December 15th, 2010 by Trefis Team
-9.50%
Downside
59.87
Market
54.18
Trefis
WMT: Walmart logo
WMT
Walmart

Probably not. We believe that Wal-Mart (NYSE:WMT) is well positioned to take advantage of the improving economy and uptick in consumer spending compared to Best Buy (NYSE:BBY). Best Buy’s recent earnings release was followed by a massive 15% decline to its stock price. This was primarily a result of drop in quarterly profit due to erosion of market share and weaker demand for TV sets and entertainment products.

While Best Buy’s price fall has been accompanied by decline in stocks of GameStop (NYSE:GME) and Radio Shack (NYSE:RSH), Wal-Mart’s stock in fact saw slight gains. We believe that Wal-Mart is unlikely to feel the pressure of weak earnings of the electronic retail giant Best Buy.

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Sentiment Gains

Concurrent with Best Buy’s earnings release, several positive reports concerning consumer spending and business confidence were released. U.S. retail sales for November have turned out to be greater than expected and consequently economists have boosted their forecasts for overall Q4 2010 retail sales. [1] Recently announced tax cuts in the U.S. are likely to aid in continuation of the momentum in 2011. Additionally, according to a recent survey the business confidence has risen significantly and business leaders are expecting increased sales, investments and hiring going forward. [2]

Wal-Mart’s Broad Appeal & Efforts

Since consumer spending improvement is still in its early stages, Wal-Mart’s broad assortment of products & goods as well as its appeal to budget conscious consumers bodes well for sales compared to electronics focused Best Buy. Its proposition of Every Day Low Prices (EDLP) seems to be drawing customers.

Additionally, Wal-Mart’s decision of aggressively pursuing electronics retailing after closure of Circuit City in 2009 seems to be paying off. The company has been able to offer several deals on electronics to grab some of the share from Best Buy. Although Best Buy’s share losses were also aggravated by its focus on mobile business over recent holiday shopping season. [3]

Not only this but Wal-Mart has also stepped up its online retail efforts to increase convenience for customers and drive sales during the holiday season. We recently wrote an article (Wal-Mart’s Online Push – Does it Make Sense?) where we discussed Wal-Mart’s online push and its free shipping offering. It looks like the company has taken several strategic steps to take advantage of improving economy and drive share gains. This bodes well for its revenue per square foot figures, however it could potentially impact profit margins negatively.

You can see the complete $65.42 Trefis price estimate for Wal-Mart’s stock here.


Notes:
  1. Retail Sales Prompt Economists to Raise U.S. Spending Forecasts, Bloomberg, 15th Dec 2010 [↩]
  2. U.S. Chief Executives Most Optimistic Since 2006, Survey Says, Bloomberg, 14th Dec 2010 [↩]
  3. US stocks pare gains in late trading, Financial Times, 14th Dec 2010 [↩]