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Analyst Cautiously Upgrades Best Buy Stock

8 Jul, 2009 By: Erik Gruenwedel

With its stock price characterized as “cheap,” Best Buy Co. July 8 was upgraded to “neutral” from “sell” by Pali Capital analyst Stacey Widlitz, who believed the No. 1 consumer electronics retailer’s economic expectations are “closer to reality” in regards to consumer spending and market share growth following the departure of rival Circuit City.

Widlitz said she could not upgrade shares of Minneapolis-based Best Buy to “buy” due to concern over a June CE consumer census report that will be released July 14.

Despite initial reports of a slight rebound in consumer CE spending, the analyst believes year-over-year second-quarter comparisons will be challenging due to last year’s federal stimulus checks to consumers (which Widlitz said contributed to a 5.3% same-store sales increase in 2008) and ongoing declines in average selling prices and unit shipments.

“We believe the deteriorating trend will continue and year-over-year industry [percentage] sales declines could potentially reach mid to high teens,” Widlitz wrote in a note.

Best Buy posted income of $153 million on sales of $10 billion in the most recent quarter, down 15% from income of $179 million during the previous year’s period.
Specifically, the analyst pooh-poohed efforts by CE retailers to entice big ticket purchases with 0% financing and easy credit terms on flat-panel HDTV units and Blu-ray home theater systems, among other items.

Widlitz said the lack of incremental technological advances in HDTV models (“Who really needs a flat-panel two inches thinner?” she said) coupled with 50% of Best Buy’s historical foot traffic driven by software purchases such as DVD movies, video games and music CDs didn’t bode well.

Pali is projecting an 8% decline in Best Buy’s domestic second-quarter (ended Aug. 31) same-store sales and a 12% decline in comp sales abroad.

“It’s pretty clear this is going in the wrong direction,” Widlitz said. “We do not think that will make investors feel any better.”

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