Insightful analysis and commentary for the US and global equity investor
Contributors: Douglas McIntyre Jon C. Ogg

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Tuesday, September 12, 2006

What Best Buy Was Really Trying To Say

Best Buy (BBY) did beat its earnings this morning by posting EPS of $0.47 versus $0.44 estimates and posting revenues of $7.6 Billion versus $7.55 Billion estimates. It re-noted that same store sales in Q3 were up 3.7%. The reason the street gapped the stock down so much at the open was that they somehow were surprised that the guidance was at the lower-end of the range. The fiscal guidance was $2.65 to $2.80, but the fiscal EPS range was as high as $2.93 and consensus was $2.80.

While we can expect that options may be a large part of the move, the open interest around the close strike prices that expire Friday is not a massive amount. What is happening is that the company is actually weathering this storm quite well because the company is probably trying to give conservative guidance that it can beat later.

We have recently had a drop in the number of new Sony PS3's, but they still are shipping as of now for the holiday season. We also have known about the Windows Vista delay for a long time, and now that will not go into effect until January. The companies that sell PC's are already going to likely use some operating system vouchers so they do not get hosed this holiday season.

The BBY stock was also already in the lower-half of its 52-week trading range of $40.40 to $59.50. At $48.50 with the stock now up $0.73 on the day and up over $2.00 from the negative open, this is obviously a success. It seems like every time the market goes in to write off the US consumer, the consumer responds by saying the rumors of our demise are grossly overstated.

We also were looking at the overall growth potential and wanted to compare this to the home improvement sector. Oddly enough, home electronics has in the past been quite tied to home improvement spending. We probably don't want to discuss the ramifications of a slower housing market, although that has apparently been reflected in the current price of Best Buy.

Before ending this we at least wanted to compare the overall stores to Circuit City, and we wanted to compare them to Home Depot and Lowe's to see if there was any forward growth problem. It does not appear that way if you look at the number of stores elsewhere. That is always a concern, but with 1,100 stores you could see many more opening before some growth issues come into play. RadioShack is hard to tabulate with any exact number since the company is closing locations, but it is a large number of much smaller stores and kiosks in the vicinity of some 6,000 company and dealer stores. They are obviously much smaller, but you can see the point as long as you don't think of RadioShack (RS) as a growth stock.

Best Buy operated over 1,100 retail outlets as of today; 128,000 employees (as of May 10); $23.15 Billion market cap.

Circuit City (CC) has 954 retail stores as of Feb.28; 46,000 employees; $4.13 Billion market cap.

Home Depot (HD) operated 2,087 retail stores as of September 7.

Lowe's (LOW) had 1,234 stores as of February 3.

Jon C. Ogg
September 12, 2006

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