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Best Buy’s Worst Nightmare

Long before Circuit City cratered, Best Buy acknowledged Wal-Mart and, rather than the No. 2 CE chain, as the two greatest threats to its business.

Management may have been proven correct. In what could only be described as a nightmare scenario for Best Buy, a Morgan Stanley analyst said that Circuit City’s TV share is being eaten by Wal-Mart and Amazon, with the discounter absorbing the low-end business and the e-tailer taking the premium sales.

In a research note reported by Barron’s, analyst Gregory Melich said he reached this conclusion by following shifts in first-quarter TV share, in which Best Buy lost ground to both. He added that further price declines in TVs and notebook computers will put added pressure on the blue-shirted ones, and that their earnings will fall short of estimates as a result.

Best Buy on the defensive? Wouldn’t be the first time. But before you call your broker, consider this: Melich also said that CE’s share of wallet typically falls for four years around a U.S. recession. And as anyone who’s spent any time around this industry can tell you, consumer electronics weathers recessions better than just about any other discretionary category. So take it from whence it comes.