If you have read some of my analysis, I believe the credit crunch is coming, and if I am correct BBY will be crunched. The last 3 years has been categorized by flat screen tv's, ipods, and Garmins. The American consumer has purchased all these things because of a weak yen and plentiful credit. Best Buy offered no-APR for 12 months and was a source of this credit (alongside a financial institution). Now, they are not sitting on too many bad loans as they sold of much their receivables which where then packaged into some CDO. However, they benefited greatly from these sales.
If you look at their quarterly earnings it net recievables increased nearly 50% in 2006 - much less than Revenue or earnings. This leads me to believe 2 things:
1. They can no longer get some of those receivables off their books
2. People are borrowing more to buy flat screen TV's
Now when put together its quite interesting. Not only is Best Buy becoming more like a bank, they are becoming a subprime lender as they are faced with many of these same credit risks. On top of that, those who borrowed from them borrowed for DEPRECIABLE assets. And one should never do that if they don't have to. Therefore those consumers that were runnign down the aisles last year appear to be strapped and their plasma TV didnt' increase in value but decreased by 50%.
My friend at college worked for this company and got us a discount (wholesale price). The biggest discounts we got were on TV's and insurance warranties. This is where BBY makes most of its money - the combination of big-ticket items at large markups and expensive insurance policies on those items. If sales of these items slows, we will see some ugly EPS announcements and 40 or lower very soon.
$48.62 (04/24/07)
