Trade Update, Aug 21st, 2012:
BBY originally opened down 10% this morning as the company did indeed take the “kitchen sink” approach to this quarter, throwing all the bad news into one earnings release. They missed earnings, decided to suspend giving guidance, suspended their stock buyback program, all that was left for them to do was say that they were turning out the lights on their way out.
The CFO left some room for optimism on the conference call, saying that he didn’t expect 2nd Half trends to continue as poorly as the 2nd quarter. But at this point, the main bullish hope is Mr. Schulze and his potential buyout bid.
So the stock has actually recovered from most of its losses over the course of the morning, now down 3% after starting down 10%. My call calendar is actually a bit higher than what I paid for it with stock here as December vol has stayed elevated as I expected, while the Sept call is close to worthless. I’ll probably sit on my December calls until we get another rumor-based headline that sends this thing on a short-lived rally again. With 4 months to expiry, that seems like a foregone conclusion.
Original Trade, Aug 20th, 2012:
Event: BBY reports fiscal 2013 Q2 earnings tomorrow morning prior to the open. The options market is implying about a 13.5% move vs the avg over the last 4 & 8 qtrs of about 7.7%
The thing is, since the founder and largest shareholder of BBY, Richard Schulze, made public his intentions to buy, and take private the struggling electronics retailer on Aug 6th with the help of private equity, the stock for the time being has ceased to be an earnings story and now falls into the fairly difficult category of “special situation”.
This morning, BBY announced they have filled their vacant CEO post, with an executive from a little known hotel management company with no electronics retail experience, Hubert Joly. It appears that the BBY board offered Schulze the opportunity to due diligence on BBY if agreed to a bit of a stay on bringing the bid directly to shareholders and id he reciprocated with details about potential financing for the deal. After the CEO announcement today it seems that talks between the board and Schulze have broken down.
SO NOW WHAT?
Sounds like a big mess right? Well normally it would take a couple months for a new CEO charged with a turn-around to get his arms around the task at hand, and then re-set Wall Street/investor expectations as to the time it will take and offer guidance that will be achievable to give him a better chance of success.
Tomorrow’s earnings call will offer none of this, Joly has yet to join the company and I would be surprised if we saw guidance that helped or hurt the company’s desire to stay independent, or Schulze’s desire to take it private.
MY VIEW: BBY is down 8% today as investors who have piled in over the last couple weeks hoping for a quick mid twenties bid are now less optimistic on the near term prospects for such a offer. My sense would be that the qtr to be reported is likely to be less than inspiring, but the guidance could have a slightly optimistic tone to it as the company tries to sugar coat a bad consumer electronics environment and an increasingly competitive environment with the hope of better than expected “back to school” sales, followed by expected pc upgrade cycle with Windows 8 and then the move into the Holiday season. THEY WILL TRY TO BUY TIME, but investors would be wise to be skeptical.
All of this noise could set up nicely for Calendars. My sense would be to Sell the Implied Move in Sept and Buy something longer dated that could give this story some time to play out.
1. Q2 and Guidance not as bad as some would fear, existing management takes calming, yet optimistic tone about turnaround with new CEO taking the helm next month, but offers little on strategy. Stock likely under-performs the implied move but continues to fill in the Aug 6th gap as investors take a wait and see approach.
2. Q2 and Guidance worse than expected, but BBY’s solid balance sheet, 3.6% dividend yield, healthy share repurchase and rock bottom valuation should buoy the stock till their all important Q4 holiday season at which point the new CEO should be solidly in place. Again I see this as a relatively neutral situation and the stock likely fills in the gap from Aug 6th, but doesn’t get nailed.
3. Q2 Beats and the company raises forward guidance and suggests that they were open to talks with Schulze but he failed to meet the boards requests as it relates to due diligence. In this scenario I could see the stock bouncing back towards the high end of the recent range btwn 21 and 22.
4. Schulze pulls together his financing and makes a hostile bid in the weeks to come and the stock trades 10-15% below the proposed value of the deal.
Obviously there are many other potential scenarios, but one of these, or a combo of some seem to make the most sense and all could move the stock btwn $17and $22 in the coming weeks.
Calendars Make a Lot of Sense Into the Earnings Event, So I am going to pick a direction, thinking that Schulze is not done, but it will likely take a little time to get his act together and I would like to find a way to own longer dated calls. I will add that I am not expecting a deal, rarely have we seen this approach as effective, but there will likely be one more push with some greater evidence of financing.
TRADE: BBY ($18.70) Bought Sept / Dec 22 Call Calendar for .62
-Sold 1 Sept 22 Call at .30
-Bought 1 Dec 22 Call for .92
Break-Even on Sept Expiration:
-If stock below 22 on Sept expiration, Sept 22 call expires worthless and I own the Dec 22 call for .62, if the stock makes a move to my strikes or above, I make the difference btwn the Sept that I am short and the Dec that I am long.
-I will likely look to spread the Dec 22 call at some point and create a call spread.
-Max Risk is .62
TRADE RATIONALE: This is not a table pounder as the vol differential of about 10 points btwn Sept and Dec is compelling it is not jump out of your chair sort of discrepancy. This trade is a 1% position as opposed to my normal 2% in my options trading account.