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'Increasingly bleak' picture for Best Buy stock after brutal earnings: analyst

·Anchor, Editor-at-Large
·3 min read

Best Buy’s stock looks like a screaming sell after it joined a worrying list of major retailers that badly miscalculated demand in the second quarter amid high inflation and recession concerns.

“The path forward is getting more challenging based on the macro backdrop and the trajectory of [same-store sales] and [operating] margin the next few years is increasingly bleak," Citi analyst Steven Zaccone wrote in a new note to clients. "We are most concerned an impending recession will hinder the ability to invest in strategic initiatives outlined at the March 2022 analyst day."

Zaccone reiterated a sell rating on Best Buy shares with a $59 price target, which assumes close to 20% downside risk from current price levels.

The electronics retailer slashed both its second-quarter and full-year financial forecasts late Wednesday, sending shares lower by 4% in pre-market trading on Thursday.

Best Buy's downward revisions are tough on the eyes:

  • 2Q Same-Store Sales: -13% (previous: about -8%)

  • 2Q Operating Margin: 3.7% (vs. 6.9% in second quarter of last year)

  • Full Year Same-Store Sales: -11% (previous: -3.6% to -6%)

  • Full Year Operating Margin: 4% (previous: 5.2% to 5.4%)

The company also said it would halt its share repurchase program after previously saying that it would execute on a $1.5 billion buyback plan this year.

Best Buy added that it would end the second quarter with inventory levels flat versus a year ago despite a sharp pullback in same-store sales. Such an unbalanced ratio of inventory to sales suggests Best Buy could experience stiff margin pressure well into year end as it marks down slow-moving inventory.

"Simply put," Zaccone wrote, "we do not see last night’s pre’ as the clearing event for the stock."

Meantime, Jefferies analyst Jonathan Matuszewski slashed his rating on Best Buy's stock to hold from buy in the wake of the profit warning.

Said Matuszewski in the note to clients, "We believe the repositioning of investor portfolios away from consumer discretionary remains early innings, and do not expect a change in sentiment to benefit the stock's multiple. Best Buy averaged a low-teens P/E multiple for the years leading up to COVID, and given the macro backdrop today, we believe a discount is warranted."

A shopper exits a Best Buy store in Washington, DC, on February 17, 2022.  (Photo by NICHOLAS KAMM/AFP via Getty Images)
A shopper exits a Best Buy store in Washington, DC, on February 17, 2022. (Photo by NICHOLAS KAMM/AFP via Getty Images)

'There is this pivot happening'

Best Buy isn't alone in retail lagging as the economy has slowed and inflation hammers margins.

Walmart also slashed its second-quarter and full-year profit outlooks late Monday. The world's largest retailer pointed to rampant inflation and a consumer retrenchment for discretionary items such as apparel. Walmart now sees full-year earnings tanking 11% to 13% compared to a prior estimate for a 1% drop.

In a pre-announcement of its own, grill-maker Weber said it badly missed second-quarter earnings expectations this week. Bath & Body Works also warned last week it would see earnings come in below consensus estimates as consumers reined in their spending.

Target, Walmart's primary rival, kicked off concerns about the retail sector's health in June with a shocking decision to liquidate massive amounts of slow-moving inventory and take a more cautious view on near-term profits.

Other retailers such as RH, Bed Bath & Beyond, and Kohl's have issued more cautious outlooks as consumers shift spending away from discretionary categories.

"There is this pivot happening from discretionary and general merchandise into necessities," Jefferies retail analyst Stephanie Wissink said on Yahoo Finance Live (video above). "The household is having to make discriminate decisions every single week about funding that inflation."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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