Best Buy Beats Estimates but Might Not Be Best Choice for Investors

The schism between the doing-well companies and the disappointing ones in the retail sector continues in full force as we enter the holiday season. This time it was Best Buy's (BBY) turn to stand on the podium of champions, while Dollar Tree (DLTR)  looked up from below its 15% shellacking Tuesday morning. The electronics retailer turned in adjusted earnings per share of $1.13, a dime ahead of estimates. Revenue of $9.76 billion nudged past estimates of $9.7 billion.

Best Buy cited the move toward its New Blue strategy as a key for the bottom line beat this quarter. Subscription-based repair and tech support services goosed margins and benefited the bottom line. Ironically, this is a service Amazon (AMZN) has not been able to make click. I believe this reflects the customers' need for some touch and feel for portions of retail, which includes electronics and appliances. We saw this in Home Depot's (HD) numbers, too, as the click-and-collect hasn't seen the acceptance management had expected. There are still purchases in which people want and need hand-holding. Smart home, mobile devices, and electronics fit that category.

Management projected Q4 earnings per share of $2.65 to $2.75 vs. its previous estimate of $2.65, so investors can expect an in line to Q4-beat as of Tuesday on revenue with a midpoint slightly below estimates. Basically, this quarter's revenue beat is next quarter's midpoint shortfall. The upper end of revenue guidance does exceed current consensus, so it is tough to call this a revenue guide down. I'd say the number is in line with expectations.

The price action on Best Buy may draw in some chasers as we head into the holidays. The stock has maybe the ugliest bullish "W" shaped pattern I've seen, but it is there and with slightly higher lows. I'd want to see shares close over $81.50 this week before getting too excited and chasing. Best Buy has often fizzled out on its rallies when the Full Stochastics indicator and StochRSI run in overbought territory for any length of time. Also, the Chaikan Oscillator has actually weakened here showing a small bearish divergence. In other words, despite the strong results and steady guidance, I would prefer a retracement to the $75 area and signs of support before going long this name. The results, though, were strong enough that Best Buy doesn't sit well as a retail short candidate in this environment.

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At the time publication, Collins had no position in the securities mentioned.