3 Reasons To Downgrade Best Buy

Best Buy Co Inc BBY reported higher-than-expected comps. Deutsche Bank’s Mike Baker downgraded the rating for the company from Buy to Hold, while reducing the price target from $38 to $32. The analyst cited three reasons for the downgrade:

1. A leadership transition to a likely well qualified but less proven executive in a key position
2. Potentially less cost cutting ahead to reinvest in competitiveness
3. A dependence on back half industry sales improvements that may not materialize

Leadership Transition / Less Cost Cutting

CEO Hubert Joly has been with Best Buy since September 2012, while CAO/CFO Sharon McCollam joined the company in December 2012. Analyst Mike Baker pointed out that since 1Q13, the company’s EPS had grown to $2.88 from $2.21 on a LTM basis, representing a 3-year CAGR of 9.2 percent.

Related Link: Analyst: Selloff In Best Buy Stock Due To Management Changes

Sales had declined from $42.6b to $39.4b, representing a CAGR decline of 2.6 percent. Despite this, EBIT was up from $1.274b to $1.592b, or a CAGR of 7.7 percent. The CEO and CFO team had a “robust and well executed” cost cutting program, while also re-invested in initiatives to win back market share, Baked noted.

“Our concern is that with $1.2b in cost takeout completed since the turnaround started, not to mention another $450mm having come out of costs in the CoGS line, we are likely at least in the middle, if not late innings of the benefits,” the analyst wrote.

2H Outlook At Risk

Baker commented that although Best Buy’s sales were now improving, share gains seemed to have slowed. He added that the bigger concern was that the 2H sales outlook depended on improvements in the mobile category, “which may be a risky proposition,” especially since that business had declined sequentially.