BBY Best Buy Company

By Steven Russolillo 

In the latest retail rout, Best Buy Co. has held up better than most. But don't expect it to last.

Shares of the electronics retailer are up roughly 9% this year, far outpacing the S&P 500's small gain. Perhaps most surprising, Best Buy's stock has been steady over the past few weeks even as a slew of apparel retailers and department-store chains, including Macy's Inc., Target Corp. and Kohl's Corp., have tumbled following disappointing results.

The good times will be tested when Best Buy releases fiscal first-quarter results Tuesday. The retailer already warned they may be ugly due to slow demand for mobile phones and tablets. Analysts polled by FactSet forecast earnings of 35 cents a share, down 6% from a year ago. Revenue is expected to have dropped 3%.

The question is how much weakness is priced into today's share price and whether its woes are transitory.

For now, at least, the market appears too optimistic. Chief Hubert Joly warned the smartphone market was approaching a saturation point. It is tough to see how sales of appliances and other big-ticket gadgets will be able to offset weakness in personal electronics.

It might be tempting to dismiss the fact that Best Buy's shares appear to have been defying gravity recently. True, they are still well off last year's highs north of $40 and essentially unchanged over the past five years. Fetching roughly 11 times projected earnings over the next 12 months, the stock is relatively cheap. But it is cheap for a reason.

Consider the broader backdrop: Sales at electronics and appliance stores dropped 2.4% in the first quarter from a year before, according to the Census Bureau. And that followed a 3.6% decline in the fourth quarter, the worst performance since 2009.

Rival home-electronics and appliance retailer HHGregg Inc. warned last week that its consumer electronics business faces heavy competitive pressure and will continue to be challenged "for the foreseeable future." And of course online retailers, notably Amazon.com Inc., are stealing market share.

In this difficult macro environment, Best Buy's shares have been among the best of a rotten bunch. It may soon rejoin the pack.

(END) Dow Jones Newswires

May 23, 2016 14:35 ET (18:35 GMT)

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