Trade Update BBY: I Whiffed On This One, & In Many Ways OutSmarted MySelf

by Dan December 13, 2011 9:30 am • Commentary

Update Dec 13th, 2011: Well I blew this one and in some ways outsmarted myself.   BBY is trading down about 9% in the pre-market, the company missed EPS estimates by .05, but reiterated the full year guidance and actually beat their same-store sales estimate.  Taking a look at what I had to say yesterday on the name I am frustrated that I didn’t just stick to what has been working and just shorting names that have run into events.  I guess being contrarian for the sake of it, and particularly on the long side of this market doesn’t work.  Unless the stock has some miraculous rally, the Dec 28/30 Call Spread I bought yesterday (that expires Friday) will be close to worthless and will not be worth selling….some may be inclined to sell this for whatever premium they can salvage, but in a market that has been this volatile it prob makes sense to leave on as a “lotto ticket”.  I guess in the end I think it is important to recognize that I went into this event risking what I was willing to lose, and if you size thing appropriately no one trade should ruin your day…..even though it has gotten mine off to a bad start.

So Nothing to do here, but chalk this one off to a total loss and maybe, just maybe you get bailed out late in the week.


Update Dec 12th, 2011 at 1:45pm: With BBY down about 1.5% prior to tomorrow’s earnings announcement I just bought one of  the trade structures that I detailed Friday afternoon on the site and on Options Action.

Let me be clear, I am not a fan of BBY’s business model or their positioning and I am bearish on the name longer term, but I feel that sentiment is poor heading into the print and with only couple weeks of  visibility so far into the Holiday selling season there is a good chance that management tries to put a little lipstick on a pig and offers an outlook slightly better than some expect….with short interest close to 12% of the float maybe this gets the stock going a bit……Longer term I am not a fan of the stock which is why I want to define my risk as I make a short term bullish play….I am risking what I am willing to lose.

TRADE: BBY ($27.60) Bought Dec 28/30 Call Spread for .65 

-Bought Dec 28 call for .92

-Sold Dec 30 call at .27

Break-even on Dec Expiration:

Profits Btwn 28.65 and 30 make up to 1.35, above 30 make full 1.35

Losses btwn 28 and 28.65, lose up to .65, with max loss of .65 28.00 or below.


Original Post Dec 9th, 2011: BBY: Q3 Earnings Preview and A Way To Play For Pop In Line With the Implied Move 

BBY $28.00

-company reports FQ3 earnings Tues Dec 13th pre-open
-Options market implying about a 7% move vs the 4 qtr avg of about 7.8% (this avg a bit deceiving as 3 of the moves were about 5.5% and one was almost 15%)

-Technically the stock is down 18% ytd but up almost 28% from the Oct lows….the chart appears to be forming a fairly interesting little head and shoulders bottom with $30.00 serving as a significant neckline/resistance level.  Also the stock is basing right below it’s 200 day moving average.

1 Yr BBY Chart From Bloomberg


Despite the street being fairly Neutral on the name with 9 Buys, 15 Holds and only 1 Sell, the quarterly previews read relatively positively heading into the print.   Below are a few excerpts from some broker previews:


Best Buy (BBY, Neutral) reports 3Q earnings on Tues., December 13th. We
are raising our 3Q estimate to $0.51 from $0.44 previously, and are now inline
with consensus, based on +1.5% domestic comps vs. -1.0% previously.
Our thoughts ahead of the qtr: comps ended quarter on a high note. We
believe BBY ended 3Q on a high note in terms of domestic comps. Our
monthly TV tracker showed momentum in TV shipments all quarter and the
Census data showed a positive 1.3% gain in the two months ending October
vs. down 0.5% in BBY’s fiscal 2Q. Additionally, we believe the iPhone
launch in mid-October turned the wireless business back to positive trends
and the company was clearly much more promotional during the critical
Black Friday weekend (sufficient to win our Turkey Leg Award). As such,
we now forecast domestic comps up 1.5%, a


Expecting better sales, but lower margins. Our 3Q EPS increase reflects an increase in our domestic comp store sales assumption to +2% (up from prior est of a 1% decrease) as our checks, particularly around Nov, came back strong. We lowered our domestic gross margin from a decline of 15bps to a decline of 50bps. We believe investors could stay skeptical if BBY’s sales are produced at the cost of meaningful gross margin declines.

We expect to see better performance in most categories this quarter. We think surprises to internal expectations probably came in lower margin computers and TVs, which could create some mix issues. Mobile should be strong on iPhone 4S and gaming should have improved this quarter with the release of better software titles. We expect weakness in areas like music, movies, navigation and point and shoot cameras. We have heard about strength in TV/electronics from general merchandise retailers such as Costco, Target and Wal-Mart.

Deutsche Bank:

For 3Q11, we are at $0.52, which is $0.01 ahead of the street. Our estimate for
comps is down 2.0%, which includes a 2% decline in both the domestic and
international business. Consensus sales forecasts are down 1%. These comp
estimates are consistent with last quarter, although BBY does have a 300 bps
easier comparison, which provides some cushion.

It’s still early in the holiday period, so 4Q guidance is important
Best Buy’s full year guidance is currently for sales to be at the low end of $51b to
$52.5b and comps to be towards the low end of a (3%) to 0% range. On the
earnings line, BBY has forecasted $3.35 – $3.60 including share buybacks, but
excluding the impact of its recent purchase of part of its Carphone Warehouse
joint venture, which excluding one-time charges should help 4Q by $0.05. A strong
Black Friday will likely enable BBY to continue to endorse this range and this
perhaps will be more important than the 3Q report itself.  

MY VIEW: while the street wants remain neutral, but the previews reflect that their checks signal Black Friday sales were better than expected across the board …..The real question is what was the price to margins through aggressive promotions?  The Q3 report is not likely to reflect the margin hit, but Q4 guidance will be the key…….Given the technical set up and the generally luke warm expectations, despite the recent stock gains, I think BBY could pop if anything at all surprises to the upside.

TRADE: BBY $28.00 Buy Dec 28/30 Call Spread for .75
-Buy 1 Dec 28 Call for 1.05
-Sell 1 Dec 30 Call at .30

Break-Even on Dec Exp:
-Profits btwn 28.75 and 30 make up to 1.25, with max gain at 30.00 or above make full 1.25
-Losses btwn 28.00 and 28.75 lose up to .75 and max loss of .75, 28.00 or below.


Alternative lower Premium Call Spread for those of you looking to risk less and possibly make more.

TRADE: BBY $28.15 Buy Dec 29/31 Call Spread for .48
-Buy 1 Dec 29Call for .66
-Sell 1 Dec 31 Call at .18

Break-Even on Dec Exp:
-Profits btwn 29.48 and 31 make up to 1.52 with max gain at 31.00 or above make full 1.52
-Losses btwn 29.00 and 29.48 lose up to .48 and max loss of .48, 29.00 or below.