Best Buy (BBY-US) struggled in the second quarter, with comparable sales falling 12.1% from a year ago as conservative and inflation-stricken consumers shrugged off big-ticket items like electronics. Gross margins for domestic operations decreased by 170 basis points from last year.
“With sales demand softening, the promotional environment has been more aggressive than last year and even exceeded our expectations for this quarter,” Best Buy CEO Corie Barry told analysts on a conference call. “From a promotional perspective, some regions have been very aggressive. Especially where there is ample or excess inventory.”
The Best Buy challenge looks set to continue into season 3.
The company expects third-quarter comparable sales to fall more than 12.1% in the second quarter. The company’s August sales fell 10% from a year earlier. Operating profit is expected to decline at a similar rate to the second quarter.
Against this backdrop, Citi analyst Steven Zaccone remains very bearish on Best Buy, even though Best Buy shares have fallen 26% so far this year.
He gave Best Buy a $61 price target, down 18.5% from its current price, and reiterated a “sell” rating.
“We remain cautious on the stock and stick to a sell,” he noted. “Same-store sales fundamentals are getting worse, the backdrop for the electronics industry is getting tougher, and there’s no talk of a multi-year margin expansion target for fiscal 2025.” within the range.”
Chaconni’s long-term thinking on Best Buy is: “During the epidemic, Best Buy has benefited from the purchase of the relief package and the demand for work and education. Therefore, Best Buy has benefited from the strengthening of consumer demand and the increasing importance of technology, but with the Shifting demand trends, there are too many red flags for this model, Best Buy is not immune to competitive pricing and increased promotions once demand slows, peer comparisons are becoming more and more intense in a fully ‘reopened’ environment in FY 2023 The more challenging, and option expirations are being recalibrated, putting pressure on operating margins. In short, consumer electronics are the winners of the pandemic, and Best Buy runs the risk of overprofits in the short term.”
Reports and forecasts from Best Buy, Kohl’s (KSS-US), Big Lot (BIG-US), Abercrombie & Fitch (ANF-US), Nordstrom (JWN-US) and others have been lackluster for retailers. The second-quarter earnings season was brutal.
The industry faces several risks as investors turn their attention to the key holiday season.
First, inventory levels are too high considering sales trends. Second, retailers aggressively promote products at the expense of profitability. Third, the start of the crucial back-to-school shopping season has been a mixed bag at best, as inflation-weary shoppers shrink from certain discretionary spending categories.