Circuit City Bankruptcy Is Great News For Competitors

A week after announcing it would close 20% of its stores, electronics retailer Circuit City (CC) has announced it will file for Chapter 11 bankruptcy protection. While that really is no surprise (retailers can’t operate in the red forever), investors should consider who wins from this development.

The most obvious choice is Best Buy (BBY), the leader in the space. Although CC is a weak player, there are many places where Best Buy and Circuit City locations are very close to each other. Given the store closings, plus the stigma of Chapter 11 with the stores that will remain open, BBY should see some incremental benefit. BBY trades at 8-9 times earnings, quite a low price for the best managed consumer electronics retailer.

Full Disclosure: Peridot Capital was long BBY at the time of writing, but positions may change at any time

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5 Thoughts on “Circuit City Bankruptcy Is Great News For Competitors

  1. Anonymous on November 10, 2008 at 11:05 AM said:

    It’s more than obvious who benefits – online retailers such as amazon on the high end and newegg and frys (former outpost.com) on the low-end.

    BestBuy is indeed very well run, but will hardly benefit from the diminishing of a competitor it didn’t actually have.

  2. Anonymous on November 13, 2008 at 7:57 AM said:

    Circuit City’s bankruptcy will good for Best Buy in the medium to long run. I’ve heard and read this thesis too many times in the last couple of weeks, and this seems to be an overcrowded long among hedge and mutual funds. But timing the right entry point in BBY is very tricky, because this is promising to be the most dreadful holiday season in many years, even for Best Buy.

    Those who think Best Buy will do well in Thanksgiving and Christmas sales will be disappointed. Best Buy is probably gaining market share because their sales are falling slower than competitors. I am looking to buy this stock but not right now, I’ll let others find the bottom for me.

  3. Covered Calls Advisor on November 14, 2008 at 7:15 AM said:

    Chad,
    I enjoy reading your blog and normally agree with and learn from your articles. However, this one on BBY is definitely and exception.

    Here is an excerpt from Wednesday’s AP article on BBY:
    On Monday, Best Buy’s largest rival, Circuit City Stores Inc., filed for Chapter 11 bankruptcy protection and said it was cutting more jobs than the thousands announced last week, citing eroding vendor confidence, decreased liquidity and the global economic crisis.

    Earlier this week investors said Best Buy was poised to benefit from the collapse of its competitor and would be able to attract customers scared by the bankruptcy filing while reaping bigger sales in the coming months.

    Now, experts said, there’s less chance for a short-term boost, even though the chain is still likely to pick up market share.

    “I think the overall market has gotten a lot worse very quickly, so they haven’t had too much time to benefit from Circuit City’s struggles,” Lemos said.

    Best Buy’s same-store sales, a closely watched retail industry metric, fell 7.6 percent in October. And same-store sales between November and February may plummet by 5 percent to 15 percent, the company said. That means annual same-store sales will slide between 1 percent to 8 percent.

    Adding to the company’s woes is its increased international exposure, said Goldman Sachs analyst Matthew Fassler. International operations made up about 30 percent of revenue for the third quarter compared with 17 percent in the same quarter a year ago.

    “The rapid appreciation in the dollar versus the euro, British pound, and Canadian dollar is pressuring international earnings,” Fassler wrote in a client note, adding that sales in Canada are declining as well.
    ———————————-

    I agree with the 2 prior comments moreso than with your assessment. Hopefully, you didn’t act on your positive analysis and take a position in BBY. BBY’s stock performance since you praised it before the market open on Monday is already down 7.8% (as of the closing price on Thursday). A $2.00($25.59-$23.59) loss since last Friday’s closing price.

    Regards,
    Jeff

  4. Chad Brand on November 14, 2008 at 7:34 AM said:

    Jeff,

    Thanks for the comments. First of all, my BBY piece was not a recommendation to buy the stock. I made two points. One, that BBY stands to see an incremental benefit from the CC bankruptcy filing, and two, that the stock traded at a single digit P/E ratio.

    The AP article you cited agrees with me on the first point, saying they are “likely to pick up market share.” That is exactly how an incremental benefit by getting some of CC’s customers would manifest itself. The fact that sales are down year-over-year does not refute that at all because all retailers are seeing sales declines. If BBY gains market share, their sales drops will be less severe than their competitors.

    As for the stock, I am not a trader so even if I was buying the stock last week (I wasn’t) I would not care at all if it dropped a couple of points. For long term value investors like myself, I would tend to think a company like BBY would be a prime candidate for new retail exposure if one was so inclined, but given the economic backdrop currently, such an investment would need to have a long term time frame to be successful.

  5. Pingback: Best Buy Shines Bright, Even in Weak Economy | Genuine Forex Trading

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