Best Buy Harmed By Difficult Environment; Argus Reiterates Hold

• Best Buy Co Inc (NYSE: BBY) shares have declined 14.04 percent over the past three months, falling to $29.04 on December 18.
• Argus’ Christopher Graja recently reiterated a Hold rating on the company.
• Graja believes the company is facing a difficult industry environment and that the below market stock valuation reflects concerns regarding the competitive landscape for consumer electronics retailers.

Analyst Christopher Graja expects “CEO Hubert Joly and CFO Sharon McCollam to drive additional operating improvements in a very challenging business environment for consumer electronics, where industry sales are shrinking by some measures.”

Best Buy mentioned that the U.S. consumer electronics category had weakened sequentially, from a 1.3 percent decline in 2Q16 to a 4.3 percent decline in 3Q16, as reflected by NPD Group’s industry-wide data.

However, Graja believes the company is gaining market share and that the stock is fairly valued at the current levels.

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Argus' Take

According to the Argus report, “management is taking a methodical approach to repositioning the business” through initiatives such as reducing costs, adding exciting in-store “shops” and divesting unproductive businesses, among others.

Challenges Ahead?

Graja, however, expressed concern that Best Buy faced two major challenges: the fierce competition online and big-box retailers, and product innovation, which is “consolidating music, video, computing, communications, gaming, and photography products into a small number of devices like smartphones and tablets, which often carry low margins.”

These challenges are reflected in Best Buy’s weak comparable sales and declining gross margin over the past several years. On the other hand, management is expected to achieve its three-year target of $400 million in cost reductions as well as improvement in gross profit.

The FY16 EPS estimate has been reduced from $2.69 to $2.65, while that for FY17 has been raised from $2.75 to $2.80.

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