Published: Aug 25, 2016 8:36 a.m. ET
Best Buy is at the mercy of product cycles and tech innovation
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Best Buy looks good now, but the future of consumer electronics is unclear
Best Buy Co. Inc.’s shares rose in their best session in more than 15 years on Tuesday. Now analysts are taking a grounded approach to the unclear future of the retailer and the consumer electronics technology it sells.
Best Buy soared past expectations in the second quarter, reporting same-store sales up 0.8% versus analysts’ estimates for a 0.4% decline and adjusted earnings of 57 cents per share, exceeding the FactSet consensus of 43 cents per share. But there are concerns about how the consumer electronics retailer will fare down the line because it is so dependent on tech innovation and has seen unstable holiday seasons in the past.
“Despite Best Buy’s positive attributes… we had become increasingly concerned over deteriorating consumer electronic category trends,” wrote RBC Capital Markets in a note published Tuesday. “We believe a more cautious stance is prudent for 2016 and beyond.”
RBC rates Best Buy BBY, +0.75% shares sector perform with a price target of $42, up from $36.
Best Buy stock closed up 0.7% on Wednesday after closing Tuesday up 20% to $39.23.
Wedbush analysts believe that a lack of eye-catching product launches will catch up with the consumer electronics giant.
“Management has done an impressive job controlling promotional activity to offset weak traffic, and continuing share repurchases have boosted earnings,” Wedbush wrote in a note published Tuesday. “However, we expect a return to persistent comp declines due to a lack of compelling new products at holiday, and believe cost cuts are approaching a limit, leaving Best Buy few options to drive EPS growth in fiscal 2018.”
Wedbush rates Best Buy shares underperform with a $20.50 price target.
The need for the “next new thing” was also highlighted in a Deutsche Bank note from Tuesday, with analysts examining the ways in which “consumer electronics continues to be about product cycles.” Wearables, analysts note, “was the biggest comp driver,” which could suggest growth since we’re early in this product cycle. However, while 4K televisions are doing well now, this could change soon as the TV cycle gets more “mature.”
“[W]ith the ‘consumer electronics’ category decelerating to 4.0% growth from 5.6% last quarter, we could be moving toward the mid- to late innings of the sweet spot for this product,” the note said. “Mobile phones and iPads are in the part of the cycle where they are still negative comp contributors, but less so this quarter than last quarter. And the phone category should be reinvigorated with the launch of iPhone 7.”
Looking further out, Deutsche Bank expects annual domestic same-store sales in the 0.5% growth range, along the same lines as the average same-store sales result over the past seven years. The bank rates Best Buy stock hold with a price target of $41.
Analysts at J.P. Morgan believe it’s difficult to look very far out with Best Buy because of the nature of the business.
“It is always difficult to extrapolate Best Buy’s results beyond one quarter given varying product cycles, the associated differing margin rates, and mix seasonality,” analysts wrote in a note published Tuesday. “While the third quarter looks conservative, the outlook beyond it becomes more cloudy.”
J.P. Morgan rates Best Buy neutral with a $35 price target, up from $30.
Analysts at Raymond James are much more optimistic, rating Best Buy stock strong buy and raising the price target to $45 from $38.
“Best Buy continues to be a good house in a bad neighborhood,” the Tuesday note said. “This is a high quality beat, with every line item better than plan.”
Moreover, analysts believe Best Buy is well positioned to compete with Amazon.com Inc. AMZN, +0.30% , with domestic online same-store sales up 23.7%. Raymond James attributes this to efforts like faster shipping options and more relevant product recommendations.
“We characterize that Best Buy is competing against Amazon more effectively than most hard-line retailers,” analysts said. “Also, Amazon is now collecting sales tax in almost every state, thus leveling the playing field in terms of competitive pricing.”
Best Buy shares are up roughly 29.7% for the year-to-date while the S&P 500 index SPX, +0.72% is up 6.4% for the same period.
Published: Aug 25, 2016 8:36 a.m. ET Best Buy is at the mercy of product cycles and tech innovation
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