UPDATE: Jefferies Downgrades Best Buy (BBY) to Hold; Sees Limited Upside in Maturing 4K TV Market
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(Updated - August 15, 2016 6:58 AM EDT)
Jefferies downgraded Best Buy (NYSE: BBY) from Buy to Hold with a price target from $39 down to $36.
The firm commented today:
- The 4K TV cycle is maturing. 4K TV product is getting commoditized more this year as prices drop and we see a significant step-up in the 4K TV assortments at mass merchants such as Walmart and Target. Meanwhile, we don’t think any of the emerging categories, such as connected home or virtual reality, will be big enough to offset slower 4K TV growth, if we are right on the trend. Best Buy has very strong market share in 4K TV and thus far has not faced stiff holiday competition from large general merchandise retailers, due to limited assortment. This holiday will be different and consumer electronics is a big category (33% of BBY’s annual domestic sales, of which we believe TV represents abouth two-thirds) with a heavy TV influence so a slowdown could put sales at risk in 2H.
- 4K TV shipment penetration is hitting a critical point where BBY comps could slow based on what we saw in the last cycle. Our analysis shows that the unit share (shipments) of both 50”-54” and 55-59” 4K TVs are approaching, or have recently surpassed, the same unit penetration thresholds that 1080p technology TVs, of the same size, surpassed when Best Buy’s consumer electronic comp started to decelerate in the last TV cycle.
- Still more cost cutting to do, but the opportunity has diminished. Also considered in our rating change is the diminished cost cutting opportunities that exist today versus the beginning of this turnaround journey. Much of the cost cutting accomplished achieved ($1.2 billion) had to get reinvested to better position BBY in the marketplace, so only a fraction fell to the bottom line. If history is any guide, we may see the same fate for future cost cutting too.
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