Fade the post-earnings rally in shares of struggling electronics retailer Best Buy, Citi says.
"Near-term Best Buy's same-store sales are still some of the worst in retail with holiday volume a significant unknown," Citi analyst Steven Zaccone wrote in a note to clients following the company's earnings report on Tuesday morning.
Best Buy stock popped 12% as the company's earnings actually beat most Wall Street estimates. The company also managed to work its inventory down by 14% year over year, sparking hope of a less than expected promotional holiday quarter.
Despite clearing a low bar, the retailer had a dreadful third quarter as shoppers pulled back on discretionary purchases and deflationary forces zapped consumer electronics. Same-store sales fell in almost all lines of the business. Profit margins tanked in both Best Buy's domestic and international segments.
U.S. and international same-store sales fell 10.5% and 9.3%, respectively in the third quarter.
Here is how Best Buy performed compared to Wall Street estimates:
Enterprise Same-Store Sales: -10.4% vs. -13.1%
International Same-Store Sales: -9.3% vs. -7.6%
U.S. Same-Store Sales: -10.5% vs. -13.4%
Gross Margin: 22% vs.22.2%
Adjusted EPS: $1.38 vs. $1.05
Zaccone, who reiterated a Sell rating on Best Buy's stock, thinks there remains under-appreciated risk as consumer spending remains cautious in 2023.
"Looking to next year, we still struggle with the EBIT [earnings before interest and taxes] margin trajectory as the top-line faces incremental pressure from a slowing consumer spending environment," he wrote.
The analyst thinks investors should stay focused on Best Buy's mixed fundamentals, and ignore what looks to be a one-day short squeeze in the stock. Those fundamentals include Best Buy management saying on the earnings call that same-store sales are down 15% through November in large part on weakening customer transactions.
"We expect Best Buy shares to see strength based on 3Q same-store sales and EPS beat as well as the slight guidance raise. We note Best Buy was one of the more shorted stocks in our coverage coming into earnings so it’s not surprising to see the squeeze rally on slightly better than feared results," Zaccone said.