UBS Asks: How Much Margin Magic Remains At Best Buy?

In a report published Tuesday, UBS analysts maintained a Buy rating on

, with a price target of $40. Census Bureau data revealed that retail sales in the CE channel declined by 2.3 percent in the first quarter as compared to a 4 percent increase in the prior quarter. "We estimate that ~55 bps of the 1Q decline was due to the shuttering of RSH Stores," the analysts mentioned. Best Buy is expected to report 1Q EPS of $0.27. The company's 1Q operating margin is expected to have declined by around 50 bps, at the low end of the company's guidance of -30 to -50 bps. In the report UBS noted, "This outlook was presented prior to the announcement of closing the Future Shop, which we think put incremental pressure on the margin in 1Q." Guarded pricing, a non-recurring benefit from its new credit card agreement and growing benefit from improved returns and exchanges are expected to have supported Best Buy's margins in the quarter. Best Buy's 2H guidance is crucial as the company continues to invest and face tougher comps.