Best Buy Is Best Sold Ahead Of Earnings; Wedbush Rates At Underperform

“Management has impressively controlled costs to offset slow revenue growth, and share repurchases have boosted EPS, but we expect comp declines to return and persist due to a lack of compelling new products and heightened discounting as a result of increasing competition,” Wedbush’s Michael Pachter said about Best Buy Co Inc BBY in a note.

The analyst maintains an Underperform rating on the company, with a price target of $24.50.

No Earnings Drivers

Pachter mentioned, however, that with little or no revenue growth going forward and cost cuts coming to an end, Best Buy has few levers, apart from share buybacks, to drive EPS growth in FY 2018.

The company is scheduled to report its fiscal fourth-quarter 2017 results on March 1, and the analyst expects the comps and EPS for the quarter to come in at the low end of the guidance and marginally below consensus.

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“Our estimates assume enterprise and domestic comps both down 1.0 percent and both at the low end of the guided range. We think that Best Buy saw sluggish holiday sales, but believe heavy promotion in January may have boosted it to a flat comp at best,” Pachter stated.

International comps are expected to have risen 2 percent during Q4, at the high end of the guidance, driven by store closures.

Comps To Decline

However, the analyst pointed out that several of Best Buy’s categories remain challenged, with comp likely to decline starting FY:18, since there are no product refreshes visible that are significant enough to drive new traffic, while prices for the company’s core categories continue to compress.

“Best Buy has maintained profitability through adept cost control, with recent store closings suggesting that these cost cuts are nearing an end. We think that a combination of negative comps and continuing margin compression will lead to lower earnings this year,” Pachter added.