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Best Buy Declines on Long-term Plan, Drags Other Retailers

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The stock market runs on sentiment and any unforeseen event in a particular sector has a ripple effect on others with a clear reflection on major indices that bear the brunt. The case is more or less the same for specific sectors that often see good or bad performance by one player influencing the performance of others. While major indices — Dow Jones Industrial Average, Nasdaq and S&P 500 — ended the last trading session on a positive note, the SPDR S&P Retail ETF (XRT - Free Report) fell 1%. We believe Best Buy Co., Inc.’s (BBY - Free Report) disappointing long-term earnings forecast may have been one of the reasons behind the SPDR S&P Retail ETF’s decline.

Best Buy Long-term Goals

Shares of Best Buy tanked 8% yesterday after the company’s long-term earnings guidance disappointed investors. It expects adjusted earnings per share in the range of $4.75-$5.00, which demonstrates a compounded annual growth rate of 8-9% from fiscal 2017 but is below the Zacks Consensus Estimate of long-term growth estimate of 12%. Meanwhile, the company anticipates enterprise revenues of $43 billion for fiscal 2021, compared with the fiscal 2017 revenues of $39.4 billion.

The Zacks Rank #3 (Hold) company stated that the Renew Blue program, which was announced in November 2012 aided it to overcome two major problems, “negative comparable sales and declining operating income rate”. The strategy helped the company to deliver compounded annual adjusted earnings growth rate of 8% in the past five years. Best Buy, which has generated cost savings of $1.4 billion in the past five years, continues to expect an additional annualized cost reduction of $600 million by 2021. These efforts have aided the stock to register a whopping gain of 196.2% in the past five years, outpacing the industry's increase of 106.9%.

Following the successful completion of “Renew Blue” program, the company launched a fresh strategy called “Best Buy 2020: Building the New Blue”. In an effort to drive growth, the company is focused on expansion of multi-channel retail business, offering services and solutions that solve customer need. Moreover, it is focusing on accelerating growth in Canada and Mexico. The company intends to establish itself as a smart home market leader by rolling out the Best Buy Smart Home Powered by Vivint home automation and security by October end.

Domino Effect

It was hard for investors to digest that Best Buy, which has been doing exceptionally well over the past few years came out with a long-term plan that failed to match analysts expectation. Following, the news investors pressed the panic button that took a toll on other retail stocks.

J. C. Penney Company, Inc. (JCP - Free Report) also felt the heat as its shares tumbled 4.3%. The operator of department stores, which reported second-quarter fiscal 2017 results in August, impressed investors with its top-line performance. The company’s total net sales surpassed the Zacks Consensus Estimate after missing the same in the trailing five quarters. Moreover, total net sales also increased 1.5% in the second quarter, following a decline of 3.7% in the previous quarter.

Shares of Dillard's, Inc. (DDS - Free Report) , which operates as fashion apparel, cosmetics, and home furnishing retailer, declined 4.4%. This Zacks Rank #3 company reported first-quarter fiscal 2017 results last month, wherein the company reported a loss of 58 cents per share, which compares unfavorably with the year-ago period earnings of 35 cents, as well as the Zacks Consensus Estimate of 21 cents. Management blamed the quarterly loss on considerable markdowns in the quarter.

Shares of Macy's, Inc. (M - Free Report) decreased 1.5% yesterday. After witnessing negative earnings surprise in the first quarter of fiscal 2017, the company posted earnings beat of 6.7% in the second quarter. Total sales also came ahead of the estimate after missing the same in the preceding two quarters. Macy’s posted adjusted earnings of 48 cents per share that beat the Zacks Consensus Estimate of 45 cents but declined substantially from 54 cents reported in the year-ago period. Macy’s currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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