Best Buy Upgrade: O RLY?

An analyst upgraded Best Buy to “outperform” the other day on the basis of the Circuit City bankruptcy and closure of 567 stores, and the stock popped after breaking under $25 for the first time in a couple of months. With the similar rosy scenarios coming out of Citigroup and J.P. Morgan, my cynical spidey-sense is tingling at this sudden and spontaneous bloom of optimism. Is it the Daylight Savings Time bump, with the seasonal affective disorder washed away?

On the face of it, a 7% boost in BBY revenue over estimates seems plausible when their #2 direct competitor just disappears. Circuit City’s revenue was down 8% in 2008 over 2007, so let’s say they were the canary in the coal mine and BBY can expect a similar decline this year having been able to stave it off through better (meaning: less incompetent) management. That puts them at about $41 billion. Current estimates for Feb 2010 are $48 billion. To get the 7% increase over $45 billion to get to that $48 billion, when starting in the hole at $41 billion, you either have to believe that Best Buy won’t see a decline in core revenue due to poor consumer spending, or that of the $11 billion in 2008 CC revenue up for grabs, Best Buy can somehow snag $7 billion of it.

Please.

They’ll be lucky to snag $2 billion of it. First, they have to be in the same market as a CC store that was shut down to win anything new. There may be a lot of places where that is true, but not enough where Circuit City was beating them in any meaningful manner. Second, they have to beat Wal-Mart for those spurned Circuit City customers (and the ones who value price over name probably will be more likely to turn to Wal-Mart than Best Buy). Finally, for the ones who value the tech over the price, they’ll have to beat Amazon. I just see those more savvy shoppers less and less afraid of going online to get their electronics.

When it comes to Amazon, I’m not exactly the earliest of early adopter, but I’ve spent about 7 times as much on products at Amazon that previously I would have spent at Best Buy in the category of “products that are Best Buy’s bread and butter”. And I’ve noticed that people who are even later adopters, on the other side of the median, are doing the same. Ten years ago dropping $1000 or $3000 on a big ticket electronic item from an internet retailer scared most people. Those days are over. Best Buy’s relevance can really only rely on instant gratification purchases with minimal friction. I do think they have technology chops and get the internet, but too late. The time to build that competency and make the change was eight years ago, not now.

I’m not the master balance sheet reader, so take my estimates of revenues as back of the envelope math based on an assumption of continued lack of consumer confidence. A 15% spike in Best Buy’s price due to upgrades based on two-month old news just doesn’t pass the sniff test for me. Spidey-sense has me staying short.