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Author: [Investments] Topic: Retail BBY and Gift Cards
rick3117 send a private message View Space | Blog | Friends | Playbook |
rick3117
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#1
Posted: 1/4/2012 5:17:06 PM
I was looking into the bad numbers for retail last quarter after a less than stellar Thanksgiving/ Christmas shopping season. 
Upon further investigation I saw that retailers can not count sales of gift cards until they are redeemed. 

Best Buy fell off a cliff after their last quarter earnings , anyone think that they could see a nice little boost with the gift card bump?  

Before you poo poo the idea just remember that gift card sales are up 10% from the 2010-2011 shopping season and add up to over 27 billion dollars.  

Am I naive in seeing this as an injection into retail,  
we are already seeing retail numbers going up.  

Is a play on BBY not the wisest given the sentiment?  
or should I go with the XRT ETF? 


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sparty444 send a private message View Space | Blog | Friends | Playbook |
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#2
Posted: 1/4/2012 8:23:50 PM

I think Barnes and Noble is maybe a better retail bet... its not without risk but I think the Nook is a quality product and with Borders out of the equation I think their brick and mortar sales could be improved.

With the stock price in the 13 dollar range they have a upside in the 18-222 range if they did solid with Nook sales. The ebook industry is becoming a large market... hence Amazon released the Fire.

I would like to see Barnes and Noble cut the fat a little and close some of their lesser stores to save money for a more aggressive marketing campaign for the Nook.

Best Buy is a company that is probably oversized... they need to adjust to the electronics business and the decreased demand for music and games. Now people tend to buy those online as they are cheaper less risky purchases.

The fact BBY is the top consumer electronics company is huge... with the right moves they are capable of improving profits and moving stock price higher.

I worked at a Best Buy when I was in college.... the people who worked there were lazy and the customer service tends to be awful... the times I have shopped at variou locations has done nothing to change my impression.... its something they need to address more.

Best Buy like most of the retailers is better off shrinking store numbers and driving more sales online. Its alot cheaper to run a warehouse than it is a brick and mortar lcoation. Whether or not BBY will adjust and recover remains to be seen... if they don't they will become irrelevant just like Radio Shack

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Wake2002 send a private message View Space | Friends | Playbook | My Sportsbook: 5Dimes |
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#3
Posted: 1/4/2012 10:09:52 PM
QUOTE Originally Posted by sparty444:

I think Barnes and Noble is maybe a better retail bet... its not without risk but I think the Nook is a quality product and with Borders out of the equation I think their brick and mortar sales could be improved.

With the stock price in the 13 dollar range they have a upside in the 18-222 range if they did solid with Nook sales. The ebook industry is becoming a large market... hence Amazon released the Fire.

I would like to see Barnes and Noble cut the fat a little and close some of their lesser stores to save money for a more aggressive marketing campaign for the Nook.

Best Buy is a company that is probably oversized... they need to adjust to the electronics business and the decreased demand for music and games. Now people tend to buy those online as they are cheaper less risky purchases.

The fact BBY is the top consumer electronics company is huge... with the right moves they are capable of improving profits and moving stock price higher.

I worked at a Best Buy when I was in college.... the people who worked there were lazy and the customer service tends to be awful... the times I have shopped at variou locations has done nothing to change my impression.... its something they need to address more.

Best Buy like most of the retailers is better off shrinking store numbers and driving more sales online. Its alot cheaper to run a warehouse than it is a brick and mortar lcoation. Whether or not BBY will adjust and recover remains to be seen... if they don't they will become irrelevant just like Radio Shack

I'd be careful with Barnes and Noble.  Fundamentally, the Company is a mess.  It has negative operating margins, it is hemoraging cash, and while at quick glance, it seems like it has $0.8 billion shareholders equity, it has almost $1.1 billion of goodwill and intangibles.  That puts its tangible net book value at negative $0.3 billion, not good from a financial position perspective, especially with $0.3 billion of debt as well 

Also, it is going heads up against Amazon, not an enviable position to be in.  Brick and mortar bookstores are a dying business, and unfortunately, that makes up a much larger percentage of Barnes and Noble's sales than its online sales.  Unless they find a way to quickly re-invent themselves, I'm not sure I'd want to be long here.

Full disclosure, I am actually short BKS and will be for the foreseeable future

 

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Wake2002 send a private message View Space | Friends | Playbook | My Sportsbook: 5Dimes |
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#4
Posted: 1/5/2012 12:31:04 PM

Well, the timing on that was a little unbelievable, and definitely alot of luck from a timing perspective, but down went BKS today.  Full disclosure, I closed out my short mid-morning, and am no longer short.  I think this was a slight market overreaction, so it should continue to drift back up again.  If it makes it back into the $12-$13 range, I'd probably re-inter a short position. 

Still not a stock I'd want a long position in though

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rick3117 send a private message View Space | Blog | Friends | Playbook |
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#5
Posted: 1/5/2012 12:44:56 PM
Wow, funny timing. Good get
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sparty444 send a private message View Space | Blog | Friends | Playbook |
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#6
Posted: 1/5/2012 3:02:53 PM

Barnes and Noble is starting to close stores... which is a great start to cut expenses. The Nook is a winning product... it just takes times to evolve. I know people in management in the company and they have said they have plans to downsize locations... they recognize that the need for a large amount of stores is no longer there.

Profits in the Nook have been solid... having access to the Borders mailing list and the number on customers they already have is huge.  It just takes time to downsize...but signs are there they will.

I have used the Fire-Nook and Ipad and personally consider the Nook a better bang for your buck.... the Fire is cmparable in price but they get you on alot of extras and apps... also having access to tech support is huge...BKS customers have that.

If BKS doesn't evolve they are dead in the water... I think they know that.... but if they do evolve... they have a good upside with the Nook. 

I still wouldn't be shocked to see someone buy BKS to get the Nook....price is cheap but getting that share of the market would be huge. Amazon would be better off buying the Nook to secure the cheaper reader share of the business than it is to sell the Fire at a loss. Amazon could close the smaller BKS stores and keep the stores open in the major markets and maybe put a couple small mall outlets to sell product and to offer tech support.

As for shorting.... not sure why you'd close your short stating the data you posted.... based on your data the company will go broke... meaning you could pocket alot of money leaving it open. The company isn't worth 10 based on fundamentals...so why close?

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Wake2002 send a private message View Space | Friends | Playbook | My Sportsbook: 5Dimes |
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#7
Posted: 1/5/2012 7:47:46 PM
QUOTE Originally Posted by sparty444:

As for shorting.... not sure why you'd close your short stating the data you posted.... based on your data the company will go broke... meaning you could pocket alot of money leaving it open. The company isn't worth 10 based on fundamentals...so why close?

For my portfolio and investing strategy, being short a stock is not a long term position.  I went short at $15.43, I was able to close out today at $10.24.  That is about a 33% return in less than a month.  On a short position, there is also the law of diminishing returns.  From this point, the stock would need to decrease by about 50% to double my return (the opposite of being long). 

Every investing decision needs to be made with probability and statistics, and how that plays into valuation, in mind.  Just because a company's fundamentals are attrocious, doesn't mean it definitely goes bankrupt.  The risk is just significantly higher.  Do I think there is a realistic shot it does go bankrupt down the line?  Sure. Do I think it happens anytime soon?  No.

In terms of this specific decision, while I don't like BKS as a long position, I actually believed that the market overreacted a bit to the news, and I think BKS will drift back up in the short-term.  Why stay short a stock that I think will go up and I can short at a higher price down the road?  If I am wrong, I still have my initial gains to fall back on.  If I am right, I get a better entry point to re-establish a full position, as opposed to the position that had been accreted by 33%.

Every investor has their own style.  Some like to ride a short all the way down to zero.  To me, that just leaves you open to a lot of excess risk.  I prefer to take my gain, back off for awhile, and re-examine at a higher price down the road if the opportunity arises.

And I don't actually open a ton of short position, (I just have a couple to hedge a primarily long portfolio), but when I see a Company with an unexplainable valuation (it makes no money so you can't even develop a P/E), attrocious fundamentals, competing in an industry with a lot of current risks, I give it a look.

If you decide to go long, I wish you the best of luck.  I just wanted to pass along some information I happened to have on this particular stock as I've spent a good amount of time researching it.  The timing on this particular down day was more a coincidence than anything

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depeche2 send a private message View Space | Blog | Friends | Playbook |
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#8
Posted: 1/6/2012 2:55:50 PM
What do they account for if the gift card is never redeemed?  They got the cash.  And what about cards that have no expiration.  They got the cash and never account for it?  I have an accounting degree but I remember literally nothing.
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Wake2002 send a private message View Space | Friends | Playbook | My Sportsbook: 5Dimes |
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#9
Posted: 1/6/2012 7:14:23 PM
QUOTE

Originally Posted by depeche2:

What do they account for if the gift card is never redeemed?  They got the cash.  And what about cards that have no expiration.  They got the cash and never account for it?  I have an accounting degree but I remember literally nothing.

In my public accounting days, I never actually had a retail client, so take this with a grain of salt, but logically, I'm pretty sure your entries are:

Upon sale of gift card:

DR: Cash

      CR: Deferred revenue (or possibly some other liability account)

Upon utilization of gift card:

DR: Deferred revenue

DR: Cost of Goods Sold

      CR: Revenue

      CR: Inventory

If the gift card's expiration date expires and the card is never redeemed, you recognize the revenue on the date of expiration (assuming the policy is firm and there is no longer a liability associated with it) and there is just no COGS component (i.e. a 100% profit margin)

If the card has no expiration date, I'm pretty sure the liability remains and you don't recognize revenue.  There may be some sort of study a Company can do to determine at what point the likelihood that the gift card will never be used becomes almost 100%, but I think that would be a pretty agressive position, and probably challenged by the external auditors.  But, this is where someone with more retail specific audit experience would probably be able to shed a little more light

 

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