Ever since I recommended shorting the SPDR S&P Retail ETF (XRT), I have been keen to look for opportunities to short individual retail names. A huge exception was Wal-Mart (WMT) which is currently making an encouraging bottoming move after a long 2015 of nearly non-stop selling. I noted Best Buy (BBY) as a prime target ahead of its November earnings. Given the selling ahead of that report, I decided to wait to pull the trigger.
After reporting earnings, BBY gapped down 6.8%. Buyers stepped right in from there and at one point were able to put BBY into the green. I bought put options to fade the fade. A month later the stock had effectively gone nowhere, so I rolled over the expiration one more month. It just so happened that BBY reported holiday sales directly ahead of the January expiration. I closed out the position as the stock fell as much as 12.5%. This time, buyers were only able to reverse a small fraction of the losses.
Source: FreeStockCharts.com
While the holiday sales report contained warnings, it also contained some assurances and an important catalyst that could make BBY a good bet off the bottom going into earnings roughly in late February/early March.
First the warnings…
Domestic revenue declined 0.8% led by greater than expected revenue declines in mobile phones and NPD-related categories (a revenue drop of 4.8%). The NPD Group includes TVs, desktop and notebook computers, tablets not including Kindle, digital imaging and other categories. BBY indicated sales of NPD productss are about 65% of Domestic revenue. As a result of the unexpected declines, BBY reduced guidance for domestic Q4 revenue growth from flat to a decline of 1.5%.
Next, the assurances…
BBY also improved Q4 guidance for a non-GAAP operating income rate decline of 20 to 35 basis points to 10 to 15 basis points. Guidance for the international business remains unchanged. Canada is a large driver of an expected 30% decline in revenue (partially thanks to the sharp decline in the Canadian dollar).
Most importantly, BBY announced that it will continue to repurchase shares through the end of the fourth quarter. The company has already spent a considerable amount, so the stakes are high for this buyback:
“On March 3, 2015, the company announced the intent to repurchase $1 billion worth of its shares over a three-year period. On a year-to-date basis, the company has already repurchased 17.8 million shares for a total of $588 million – of which 6.6 million shares, or $203 million, were repurchased in the nine-week period ended January 2, 2016. The company intends to continue to repurchase shares through the end of the fourth quarter.”
BBY closed at $39.18/share on March 3rd and traded as high as $41.77/share that month in the wake of the news on repurchases. BBY has not traded higher since. This latest news reveals that the company, fortunately, will end up spending the majority of its funds at much cheaper prices. Still, the average price for the 6.6M shares repurchased is $33/share, a whopping 28% higher than current levels. The promise to continue this furious pace of buying through the end of the fourth quarter should at a minimum put a floor under the stock. The buybacks apparently succeeded at putting a floor under the stock until the report on holiday sales. I am guessing BBY management is quite surprised by the depth of the market’s reaction. With the stock market extremely oversold, I am expecting BBY to participate strongly in any relief rallies going forward. I have started out nibbling on a few call options as one part of my oversold trading.
Be careful out there!
Long BBY call options