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May 25, 2017

S3 Research: Best Buy 1st Quarter Beat Cost Shorts $388 million

Best Buy Co Inc. (BBY US) shook off the Amazon (AMZN US) online shopping effect and reported better than expected 1st quarter results with EPS of $0.60, beating estimates by $0.20 and revenues of $8.53 billion, which beat estimates by $25 million. In addition to an exemplary quarter, Best Buy raised 2nd quarter and 2017 full year EPS and revenue forecasts.

Best Buy’s stock price is up 104% since the beginning of 2015, but short interest in the consumer electronics retailer is up $1.3 billion, or 155% over that same time period. BBY short interest is up $816 million, or 60%, this year and up $413 million, or 23%, this quarter. Short sellers continue to build their positions even though BBY’s revenues have stabilized and are beginning to turn upward. In fact, BBY short interest makes up half of the $4.3 billion of worldwide short interest in the Computer & Electronics Retail sector.

Best Buy short sellers have not fared well since 2016 and are down $1.1 billion in aggregate. In 2016, short interest averaged $1.1 billion and short sellers lost $444 million in mark to market P/L, or 39.5%. Short sellers are down $388 million in mark to market P/L on today’s 22% price spike lowering 2017 year-to-date loss down to $656 million, for a negative 39.8% return on an average short position of $1.3 billion.

BBY’s abrupt increase in stock price would lead speculation that shorts are being squeezed and buying back their shorts to get out of their unprofitable trades, but in reality we are seeing very little covering today. BBY’s price move is virtually all long buy side demand driven. If, and when some of the $2.2 billion worth of shorts start to cover, BBY’s stock price will have a turbo charge to climb even higher.

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Head of Research, S3 Partners
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