World Business

Investors escape after the retailer’s executives say they don’t know how gloomy this holiday season will be

By Ben Steverman

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Best Buy (BBY) terrified investors on Nov. 12 with bad advice indeed. The electronics retailer said it sees consumers sharply cutting back their expenditure. Even worse, the well-respected executives at Best Buy seem to have little essence how bad conditions could get this holiday moderate.

"Since mid-September, rapid, seismic changes in consumer carriage have created the most difficult climate we’ve ever seen," Best Buy Chief Executive Brad Anderson said in a announcement. "In 42 years of retailing, we’ve never seen such intricate ages for the consumer," added Brian Dunn, Best Buy’session capital operating officer and president. "People are make dramatic changes in in what state much they spend, and we’re not immune from those forces."

Those fearful quotes stirred concern in the house market because, on balance, Best Buy is seen as one of the strongest players in the retail industry. A chief rival, Circuit City (CC), filed for bankruptcy protection on Nov. 10, while another rival, Tweeter, is shutting all its stores. Best Buy, meanwhile, is gaining market certain quantity and appears to have plenty of cash to keep expanding even during a offensive recession.

Still, the statistics dress in’confidentially behold good even with respect to Best Buy. The retailer cut earnings-per-share expectations for fiscal 2009 on Nov. 11 from a register of $3.25 to $3.40 to a wider register of $2.30 to $2.90.

Driving Best Buy executives’ pessimism is a scarcity of customers buying electronics. Same-store sales, those at stores open a year or greater amount of, fell 7.6% in October, but this could be just the beginning. The partnership expects same-store sales in the next four months—November to February—could fall as little in the manner that 5% or plunge in the same manner with much as 15% from the year before. Best Buy shares fell 8% on Nov. 12 to close at 21.97. Its stock is down 58% this year.

The magnitude of the revisions to earnings and sales estimates was surprising to many analysts and investors, but likewise more surprising were the wide ranges of Best Buy’s estimates. "There is just no exposure to view," says Terry Morris, senior theoretical conductor at National Penn Investors Trust Co. "These retailers don’face to face know what to expect."

Morningstar (MORN) analyst Brady Lemos points out that "this is a dissimilar environment" than anyone is used to, demonstrated by Anderson’s remark that this is "the most difficult climate we’ve ever seen." Previous recessions are little clew to executives and investors now, Lemos says. "It’s not the typical six-to-nine-month slowdown," he says.

With unemployment rising, consumers are worried about their income potential, says Scott Tilghman, an analyst at Hudson Square Research-Soleil Securities. With credit-card firms and banks cutting posterior portion on credit, consumers can’t simply take, he adds. And falling home prices and a plunging garner market have Americans worried about their overall net excellence.

Best Buy’s "performance tells us the scope of this recession is impacting mid- to higher-income families faster than most anticipated," wrote Raymond James (RJF) analyst Dan Wewer on Nov. 12.

There are some advantages for Best Buy: It’sitting in a stronger financial dictum than rivals, by Tilghman estimating the unshaken be pleased generate end for end $600 million in unobstructed cash flow in fiscal 2009 even if earnings are at the midpoint of the firm’s new, lower calculation kind. And in the long run, the troubles at Circuit City, in the same manner with well as the strains on several regional electronics chains, should help Best Buy expand market share.

But in the short term, many wonder if retailers are setting themselves up for a massive value war that will wipe out profits this festival season. Closing stores may be liquidating merchandise just as their rivals, stuck with just too much holiday inventory, are also slashing prices. "Best Buy does have a great track vestige," says Morris. "If they’re having tough times, what’s going to befall to companies that aren’t as financially sound?"

Much depends without interruption how many consumers show up ready to shop for bargains from Thanksgiving to Christmas. And, here, retailers like Best Buy are flying blind. "No one knows the sort of next week will bring," says Tilghman, much less the undiminished anniversary season or next year.

Eventually, the retail sector behest recover, and many analysts bet that Best Buy will prosper in a post-recession rural scene. But no one knows how long consumers’ scrupulous vein will last. Another important question is how much the slowdown and credit crunch are permanently altering Americans’ appetency for TVs, phones, computers, video games, and other pricey gadgets.

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