Bad News for Best Buy Is Good News for RadioShack and Gamestop

Best Buy reported third quarter EPS of $0.54, below the consensus view of $0.60 largely due to a sales shortfall in its domestic business. Exactly, the big negative surprise appeared to come mainly in TVs, as then as mobile computing and game software. But, this was not simply a result of weaker consumer spending, as Best Buy said it lost market share in all of these categories to competitors.

For RadioShack, it's more about the categories where they do not compete with Best Buy. The whole "Modern Home" sales category at RadioShack -- which includes TVs, computers, home theater, VoIP (Voice over Internet Protocol), DVD and many other items -- is only 13% of its total sales. Furthermore, expectations are already very low for this category, given its decline for the last four quarters; to some extent, we think the Best Buy and discount-store clients are more closely aligned than are the RadioShack clients, who are more focused on convenience and experience. Taking everything into account, Best Buy talked about improving trends for TVs. Best Buy reported September-November, during RadioShack has already reported through September, suggesting that the worst months, from an industry perspective, could be behind RadioShack already.

More positive note

On a more positive note, wireless -- a category where Best Buy confirmed industry sales remain strong -- is a huge +45% of total sales for RadioShack. RadioShack is however benefiting from the introduction of the iPhone this year and seeing expansion via its new store-within-a-store at Target. At 8.5x the consensus EPS forecast for then year, RadioShack as well appears to be an inexpensive way to bet on a consumer recovery, as then as on strength in the smartphone market.