Best Buy Co Inc (BBY) to Lose Ground Long-Term Against Major Online Retailers

Buybacks Not Enough to Spur EPS Gains Down the Line


On Tuesday, Best Buy Co Inc (NYSE:BBY) reported a robust fiscal second quarter beat, which well surpassed both consensus and company guidance. Offsetting waning tablet sales, the company saw stronger stateside comp growth from categories like computing, mobile phones, wearables, and CE. On the international scene, the company succeeded in partially balancing a negative foreign currency translation with solid comp growth from CE and Appliances. Notably, online sales generated 3.4% of domestic comp, while in-store sales only made a 2% contribution to the total domestic comp of 5.4%. The online story is where the real battle will go down.

Analyst Michael Pachter of Wedbush, underscores the “brewing battle for online supremacy between competitors Amazon and Walmart.” Moving forward, opines the analyst, “We expect declines in Q4:18 comps driven by aggressive holiday pricing as Walmart intensifies its competition with Amazon, with Best Buy caught in the crossfire. In FY:19 comps become difficult and margin pressure will intensify, however we expect Best Buy to continue share repurchases to lift EPS.”

As such the analyst maintains an Underperform rating on BBY stock, while raising the price target from $29.00 to $33.00 representing a 39% drop under current trading levels. (To watch Pachter’s track record, click here)

Second quarter revenue of $8.94 billion easily beat out consensus estimate of $8.66 billion, the analyst’s prediction of $8.72  billion and its own guidance which placed revenue expectations between $8.6 billion – $8.7 billion. Meanwhile, EPS of $0.69 also surpassed all predictions, including: guidance between $0.57 and $0.62, the analyst’s forecast of $0.61 and consensus of $0.63. Looking ahead, the analyst is raising revenue and EPS estimates for both fiscal years 2018 and 2019. For 2018, Pachter is lifting revenue from $40.1 billion to $41.0 billion and EPS from $3.77 to $3.95, in-line with the upper end of guidance. For 2019, working under the assumption that share repurchases would offset a 6% net income decline, the analyst is boosting revenue expectations from $38.9 billion to $39.7 billion and EPS from $3.41 to $4.07.

However, despite a great second quarter, Pachter sees a number of challenges ahead for the electronics giant noting that “industry tailwinds and market share gains from struggling or bankrupt competitors is transitory, and expect comp declines to resume beginning in Q4 and to continue over the long-term due to heightened competition from online retailers, simultaneously pressuring gross margin. As it has pared its cost structure to the bone, Best Buy has few levers other than buybacks to drive long-term EPS growth.”

TipRanks analytics exhibit BBY as a Buy. Out of 10 analysts polled by TipRanks in the last 3 months, 5 are bullish, 1 is bearish, while 4 are sidelined on Best Buy stock. With a potential upside of 20%, the stock’s consensus target price stands at $65.14.

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