Best Buy No Longer A Buy: Here's The Data That Shows It

• Best Buy Co Inc BBY shares are down 18 percent year-to-date, having declined steadily after hitting a high of $38.96 on September 16.
• RBC Capital Markets’ Scot Ciccarelli downgraded the rating on the company from Outperform to Sector Perform, while reducing the price target from $42 to $36.
• Sales trends in the consumer electronics category are deteriorating, and the company would need to generate sustained comp improvement to warrant an Outperform rating, Ciccarelli said.

Analyst Scot Ciccarelli mentioned that Best Buy has some positive attributes, like gaining market share, a modest valuation, a strong balance sheet and solid cash flow. He added, however, that there is growing concern surrounding “what appear to be deteriorating sales trends in the consumer electronics (CE) channel.”

Government sales data for CE and Appliances has continued to deteriorate on both a one- and two-year basis. Prior to the current trend, the last time there was negative CE retail sales growth for multiple months was in late 2013 and early 2014, when Best Buy missed its holiday sales target, Ciccarelli pointed out.

Related Link: Wedbush Maintains Neutral Rating, $37 Target On Best Buy Ahead Of Q3 Results

The analyst added that retailers were faceting selling pressure and missing top-line projections, citing the examples of Macy's, Inc. M, Nordstrom, Inc. JWN and Advance Auto Parts, Inc. AAP.

The deteriorating sales trends, other retailers missing revenue expectations, Best Buy’s own historical volatility around the holidays, and “our view that the company needs to post sustained comp improvement for the stock to re-rate above other comp-challenged retailers” make the company’s risk/reward appear “increasingly unattractive,” Ciccarelli mentioned.

The comp estimate for 3Q has been reduced from 1 percent to -1 percent. The EPS estimates for 3Q, 2015 and 2016 have been reduced from $0.36 to $0.33, from $2.67 to $2.62 and from $3.00 to $2.95, respectively.