Best Buy (BBY) PT Lowered to $75 at Credit Suisse, '2H Hail Mary?'

Credit Suisse analyst Karen Short lowered the price target on Best Buy (NYSE: BBY) to $75.00 (from $85.00) while maintaining a Neutral rating.

The analyst comments "BBY’s 1Q results demonstrates the company’s ability to manage the business despite a very challenging environment for CE. That said, QTD trends are softer than expected – BBY guided 2Q comps/EBIT margins down -6-8%/~3.0% below FactSet Consensus of down -5%/3.6%, meaning the 2H trends need to materially accelerate – which is risky given the weak consumer environment and the potential for a more promotional environment in 2H23. That said, we’re encouraged BBY has some visibility to a normalized pace of product innovation from vendors by the end of CY23 to drive demand. Longer term, while we appreciate BBY’s efforts to manage expenses like store payroll and fine tune its loyalty/subscription programs to be more margin accretive, our concerns are focused on the company’s ability to recover EBIT margin in CY24 and beyond. Specifically, we see some of the margin headwinds the business faces today as more structural than transitory (parcel shipping rates, warehouse expenses including labor, intermodal transportation). On the positives: BBY showed 1) solid inventory management (inventory down 17% vs sales down 11%), 2) improved GMs +60bps YOY (vs Consensus +40bps) reflecting the benefits of revamping BBY’s loyalty/subscription programs, and 3) solid expense control where possible (SG&A down -2% vs sales -11%). On the negatives: QTD trends have been soft and 2Q comps (-6% to -8%) were guided below Consensus (-5%), highlighting the industry-wide pressure that remains today on Discretionary categories like CE. Importantly, by maintaining CY23 guidance, BBY’s 2Q guide implies a very sharp acceleration in both sales/margin trends in 2H. For context, to hit BBY’s CY23 guidance for comps of down -3% to -6%, 2H comps at the midpoint would need to inflect to -2% on a 1-yr basis (vs 2Q -6% to -8%). On a 2-yr stack basis, the acceleration is even more significant: to -11% in 2H from -18% to -20% in 2Q. On margins, implied 2H EBIT margins of ~4.3% at the midpoint of guidance implies a significant improvement on a YOY basis (even with slight help from the extra week in 4Q)."

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