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Why a Bearish Stance on Best Buy?

Zacks Equity Research

We downgraded our recommendation on Best Buy Co., Inc. (BBY) to Underperform with a target price of $22.00. Our bearish stance on the stock is also supported by its Zacks Rank #5 (Strong Sell). So far in the year, the stock has dipped 39%.

Why the Downgrade?

Best Buy started the year on a very soft note with stock prices tumbling sharply following a dismal holiday sales performance and the subsequent trimming of guidance, thus raising concerns over the company's restructuring strategy.

The company’s sales fell 2.6% year over year to $11,451 million for the nine weeks ended Jan 4, 2014, while comparable-store sales dropped 0.8% over the same time frame. Tight supply of key products, lower traffic and weakness in mobile phones category contributed to the lower-than-expected sales.

The consumer electronics retailer held that intense promotional war, which characterized the holiday season, had significantly impacted its margins and thus compelled a downward revision in its operating margin guidance. The company had cut down prices, at the expense of profits, to compete better with peers such as Wal-Mart Stores Inc. (WMT) and Sears Holdings Corp. (SHLD). Best Buy now expects the operating margin to shrink 175-185 basis points year over year during fourth-quarter fiscal 2014.

The trimmed guidance triggered a downtrend in the Zacks Consensus Estimate, as analysts became less constructive on the stock’s future performance. This is evident from the movement witnessed in the Zacks Consensus Estimate that plunged 24.8% to $1.85 per share for fiscal 2013 and roughly 20.9% to $2.23 per share for fiscal 2014 in the past 30 days.

A Stock That Warrants a Look

A better-ranked retail stock that looks promising and is expected to continue with its upbeat performance is Conns Inc. (CONN) holding a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on BBY
Read the Full Research Report on WMT
Read the Full Research Report on SHLD
Read the Full Research Report on CONN

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