Signup for our free newsletter:

"Seismic Changes" at Best Buy

Written By Brian Hicks

Posted November 12, 2008


game over


It is days like today that really make you question the whole idea of the “rational market”

That’s the thesis that suggests the market is somehow all-seeing and all-knowing.

As result, according to the theory market prices simply reflect the sum total of all the market knowledge on any given day. Simple enough.

But if you ask me, it’s an idea that has always been a little too simple. That’s because markets are made up of people and people are far from simple.

In fact,  sometimes they are often down right irrational. That puts the rational market theory on some real shaky ground in my book.

What happened this morning with Best Buy is just the latest example.

Somehow the “rational markets” were completely thrown for a loop when the nation’s biggest electronic retailer warned on sales and cut its outlook. And in the aftermath, the DOW gapped down big on the news and sold off hard on the open.

Now ask yourself for a minute how “rational” that really is.

After all, wasn’t it just on Monday that Circuit City filed for bankruptcy? And who exactly didn’t know by now that the Christmas season this year is going to be soft?

Well apparently the Street didn’t know it since its “rational markets” were blind to both. So today what happened at Best Buy is somehow news. It’s comical.

Nonetheless, what happened at Best Buy this morning is just another piece of the growing mountain of evidence that the consumer is rapidly retrenching—that is slamming their wallets shut.

In fact, it has gotten so bad in such a short period of time that Best Buy CEO, Brad Anderson said in a statement:

“Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we’ve ever seen. Best Buy simply can’t adjust fast enough to maintain our earnings momentum for this year.”

Ouch. Here is the rest of the story.

From Reuters entitled: Best Buy cuts forecast amid weak consumer spending

“Best Buy Co Inc. the No. 1 U.S. electronics chain, slashed its fiscal 2009 profit forecast on Wednesday, driven by weak consumer spending heading into the crucial holiday selling season.

Best Buy’s announcement comes just two days after smaller electronics retail rival Circuit City Stores Inc CCTYQ.PK filed for Chapter 11 bankruptcy protection.

The company said it expects to end the third quarter with higher inventory levels, short-term borrowings and accounts payable than previously projected due to the drop in consumer spending.

Shares of Best Buy fell nearly 13 percent in premarket trading.

“In 42 years of retailing, we’ve never seen such difficult times for the consumer. People are making dramatic changes in how much they spend, and we’re not immune from those forces,” said President and Chief Operating Officer Brian Dunn.

The company also faces increased competition from Wal-Mart Stores Inc, which has stepped up its advertising on electronics such as flat-panel televisions as a big part of its holiday push that emphasizes low prices.

With the U.S. economy in what many economists say is a recession, most retailers, whether they sell clothes or higher-end electronics, are seeing sales pressured.

“People selling $30 pairs of jeans are struggling so imagine trying to sell a $3,000 television,” said Jon Fisher, portfolio manager at Fifth Third Asset Management.

Best Buy said comparable store sales fell about 7.6 percent in October after falling 1.3 percent in September. It said comparable store sales in November 2008 through February 2009 could decline by 5 percent to 15 percent, leading to an annual comparable store sales decline of 1 percent to 8 percent.”

Now that really is seismic.

But nobody should be surprised by it—-least of all the “rational markets”.