Retail

Will Best Buy Follow Kohl's or Macy's?

Thanks to an earnings beat by Kohl’s Corp. (NYSE: KSS), we no longer have to be in a full-blown panic over the future of retail department stores. Macy’s Inc. (NYSE: M) disappointing earnings gave investors a real scare for a second, but not all is lost for the sector it seems. The big question now is whether Best Buy Co. Inc. (NYSE: BBY) will be another Kohl’s or another Macy’s.

Without a crystal ball nobody knows for sure, but here are the factors to weigh. First, competitors like Costco Wholesale Corp. (NASDAQ: COST) experienced a slowdown in consumer electronics in October. This could point to a magnified effect on Best Buy revenues come earnings next week. Weak September/October sales should not be surprising, given the concurrent stock market collapse at the time. Even Kohl’s reported weak September sales, though it still managed to beat estimates.

Revenues for Best Buy may miss for the same reason, but earnings could still beat because of efficient cost cutting, which has been working for the company for years. Despite revenues being down 12% since 2011, Best Buy has really tightened up operations since then, moving from a net loss of $1.2 billion to a net gain of the same. Much of that has to do with past store closings, but the economic adjustment has been an overall success. The retailer has beaten Wall Street estimates by an average of 11 cents every quarter for the past year, and that may happen again despite weaker than expected sales.

Weighing the probabilities of a decline in revenues versus an earnings beat due to lower expenses, what exactly will happen with Best Buy come next earnings is really a tossup. Combine that with the strong divergence between Macy’s and Kohl’s and the results are even more unpredictable.

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Nevertheless, one thing is a bit more assured. If Best Buy turns out a disappointment next week, sinking shares, it could prove to be quite a buying opportunity. Any Federal Reserve rate hike will be too little too late in slowing down retail spending, as the next FOMC meeting when a hike is most likely will be December 16, toward the tail end of the holiday shopping season. Given the robust jobs market of late and the continuously falling unemployment rate, consumers are likely to be more liberal with their spending than they were last year. This could translate into a good fourth quarter for Best Buy and other major retailers as well, translating to a higher share price come February.