Electronics retail giant Best Buy (NYSE : BBY) was the toast of Wall Street this past week, with its equity valuations jumping up nearly 7% on Thursday (Nov 20) by beating earnings estimates. Critical to the bullish sentiment on the street was an increase of same-store sales to the tune of three-percent during the third quarter. Also, a marked improvement in online sales, which increased by 21-percent from the prior quarter, put to rest fears of the impact of “showrooming,” a pejorative uttered by brick-and-mortar establishments that criticize consumer tendencies to use stores such as Best Buy to physically test wanted products before making an actual transaction through an online retailer like Amazon. With much needed enthusiasm in the retail sector, especially after a Bloomberg report noted an unexpected decrease of 0.2-percent in consumer spending for month of September, will Best Buy lead the way towards a resurgence? And what does their turn of fortune mean for the U.S. economy in general?
Throughout most of 2014, Best Buy shares have formed a distinct and reliable trend channel that has rewarded long-term investors with solid gains. Since bottoming in February of this year, shares are up over 69-percent at time of writing (Nov 22), making the retailer one of the strongest performers of this year, if it were not for the unfortunate and dramatic drop that it incurred in mid-January, when valuations gapped down an incredible 28.6-percent. Comparing peak-to-trough from the November 2013 highs until the February 2014 bottom, investors during this cycle essentially took a halving haircut. Perhaps a more appropriate term would be a scalping…
Ultimately, this singularly extreme volatility may be the defining pivot of Best Buy. Not only will the November highs of the prior year “provide” strong technical resistance as traders play chicken over a meaningful psychological battleground, it will test the true fundamentals of the bullish case for Best Buy. What caused the enormous sell-off earlier this year? According to an Associated Press report on January 16th, Best Buy reported disappointing sales during the holiday shopping season, which raised questions at the time regarding management’s ability to turn around a struggling business. One of the reasons cited for the weakness was lowered consumer spending habits, along with a dramatic increase in holiday sales promotions by direct and indirect retail competitors.
For this year’s holiday season, consumer spending should be on the rise, given the fall in the crude oil market. While winter typically brings lower prices at the pump, the recent price drop has been exceptionally conspicuous and that is undoubtedly fortuitous for the greater economy. However, this circumstance may be a case of robbing Peter to pay Paul: a decline in demand equates to a rise in supply. Oil supply likely is not rising based on the much-hyped fracking industry, but instead on lowered net consumer spending. While an in-depth analysis of the labor market is beyond the scope of this article, it is clear from established sources such as the ADP National Employment Report that substantive jobs have been replaced with substandard jobs since the onset of the Great Recession. That means people have less money overall to spend on basic commodities, driving down demand across the board.
Best Buy and other heralded retailers should see a technical boost during the final quarter of 2014: momentum and overall trading sentiment is at a positive for Best Buy shares. That being said, strong technical resistance is to be expected at around the $43 ~ $44 price range. At that point, perhaps during January of 2015, the bean counters will be able to fully assess the situation. If lowered gas prices are not enough to overcome a qualitatively weakened labor market, a nasty return to mediocrity may be imminent and inevitable.