Event: Best Buy (BBY) reports their fiscal Q1 results tomorrow before the open. The options market is implying about a 6.5% one day move vs the 4 qtr avg of about 5%.
Price Action / Technicals: the stock is down 11.5% year to date, and down about 20% since its 52 week highs made in mid March.
The one year chart is a disaster, a gap to start the year out after disappointing holiday sales, a fairly remarkable gap fill and a breakout to new 52 week highs, and then a round-trip of the entire move, now below key 8 month technical support:[caption id="attachment_53837" align="aligncenter" width="600"] BBY 1yr chart from Bloomberg[/caption]
Sentiment: Wall Street analysts remain fairly bullish on the stock with 20 Buy ratings, 9 Holds and no sells with a 12 month price target of $43.50, or 28% higher than current levels. Short interest is almost 10% of the float.
My View: BBY screens as a cheap stock for a reason. The company is in the midst of a massive secular shift in electronics retailing, and frankly on the side that is not likely to win. While bricks and mortars retailers will always exist, their shear presence will be at the expense of margins to compete with the likes of Amazon and now Walmart who will send items for nearly free by mail. BBY is likely to join the Prime fray soon, but it won’t help profitability. Fiscal 2016 should mark the 4th consecutive annual sales decline for BBY.
So far in this cycle for retailers, we have seen few rewarded for beats, and many demolished (COH, DDS, KSS, LOW, URBN, RL, WFM, WMT) on disappointments. I suspect it could be a shoot first ask questions later if BBY were to miss and guide down when they report tomorrow morning.
Potential Trade: five out of the 6 most active options strikes are puts, and the stock’s 8% decline since May 11th suggest that investors are beared up. The largest block of options on the day was buy of 1500 May 22nd weekly 34 puts for 1.02 when the stock was $34.43. For those that think the stock can have an out-sized move to the downside, that’s probably the put to own for the event. As always we are weary of long premium directional options trades into potentially volatile event as you have to get a lot of things right to just break-even, like direction, timing and magnitude of the move. Its also our sense that this is a consensus short, meaning….crowded.