The consumer's fading -- not dead or dying, but fading. Best Buy
(BBY)
is the latest microeconomic tell to indicate that the consumer's not carrying the economy as it has for most of the last quarter century and certainly for the last five years since we left the Great Tech Depression of 2000 to 2002.
Let's dig into the Best Buy numbers a little bit to see if we can draw some investment and trading conclusions from the trends the company is confirming.
Same-Store Slide
First off, the top line was reported as growing 14%, and while that number is impressive, it includes 131 stores the company acquired with its China moves last year. Best Buy opened 99 new stores outright, which helps provide geographic growth and, thus, also boosts top-line results over the more telling same-store sales numbers. Those same-store numbers tell us exactly how much demand growth the consumer showed for Best Buy's leading-edge electronics product lines. And that number? Three percent.
Three percent is still growth, to be sure. But it's not exactly screaming, exciting growth. That 3% is down from 4.9% same-store sales growth last year. Since spending per household on electronic products is gaining relative to other discretionary items, the consumer's discretionary spending trend is worrisome.
We already knew that about the lower-income consumer, as Wal-Mart
(WMT)
, Target
(TGT)
and others have warned repeatedly over the last few months. Now we're starting to see it trickle up into more consumer-spending trends.
Best Buy saw its gross margins take a 150-basis-point hit from last year. That's due in large part to slowing sales of big-ticket items relative to lower-margin, lower-priced items. We can safely assume that housing's downturn and the declining access to capital for such big-ticket purchases is trickling down to Best Buy now.
Superstars Lose Their Shine
Speaking of trickling down, the consumer-electronic suppliers, who were superstars for the last five years, are likely to see some pushback from their customers as consumer-demand growth has slowed. Corning
(GLW)
, a stock I've traded/invested in on both the long and short sides, might be an interesting play on this theme, and the stock is down today because I'm not the only one connecting these dots. Corning's a great company, though, and I'd rather focus on other, more-incompetent electronics suppliers, such as Genesis Microchip
(GNSS)
, which is seeing forward-looking estimates decline steadily.
Keep in mind, too, that Best Buy claims to still be taking market share from its competitors. That means Circuit City
(CC)
and others are likely going to show barely discernible same-stores sales growth in coming days and weeks.
Where to Put Your Money
The bright side to Best Buy's punk quarter? Total first-quarter online revenue grew more than 20% compared with the same quarter of the prior year. That, even after the WSJ and others have lately decided that the declining second derivative of online sales growth has turned negative, is some seriously meaningful growth.
Three percent vs. 20%. That alone underscores why I'm sticking with Internet-boom suppliers, such as Riverbed Technology
(RVBD)
(of which I need to take, say, 20% off the table), as well as beneficiaries, such as New York Times
(NYT)
, and distributors, such as Google
(GOOG)
-- rather than fighting the troublesome real-world consumer.
At the time of publication, the firm in which Willard is a partner was net long Riverbed Technology, New York Times and Google, although positions can change at any time and without notice.
Cody Willard is the manager of CL Willard Capital Management, LLC. He is a regular guest on Fox News, CNBC and other networks, and he writes a monthly column for the Financial Times. He is also an adjunct professor at Seton Hall University and the author of TheCodyReport.net, a monthly stock market newsletter. Willard appreciates your feedback -- click here to send him an email.
