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Pali Downgrades Best Buy Stock to ‘Sell’

15 Apr, 2009 By: Erik Gruenwedel

Buffeted by the latest government retail sales figures that indicate the recession is far from over, Pali Capital analyst Stacey Widlitz downgraded shares of Best Buy Co. to “sell” from “neutral”.

Investors continue to be cautious after government data showed U.S. retail sales fell 1.1% in March following a two-month upswing.

Electronics and appliance stores sales decreased 5.9% seasonally adjusted month-to-month and decreased 10% unadjusted year-over-year, according to the National Retail Federation.

“A chilly start to spring and a late Easter combined for dreary March sales,” said Rosalind Wells, chief economist for the NRF.

For Minneapolis-based Best Buy, reportedly the largest retailer of Blu-ray movies, analyst Widlitz based her downgrade of the stock on the fact consumer electronics sales in March were the worst since last December.

Indeed, Wal-Mart, heretofore immune to the recession, reported a 1.4% same-store (open at least 12 months) gain in consumer electronics, which was 1.8% below expectations.

Widlitz said Best Buy did capture about 30% of business from shuttered Circuit City Stores but that it wasn’t enough to offset the economy. She said Circuit City’s liquidation promotions spiked consumer interest but muted somewhat when consumers realized prices were not any cheaper than at Best Buy or Wal-Mart.

As the liquidation sales continued, Widlitz said consumers increasingly encountered “chaotic” and “out-of-stock” Circuit City store locations and opted to actually purchase CE product at Best Buy and other locations.

“That may have been an artificial lift,” she said in a note. “Our theory remains that Circuit City liquidation pulled CE sales forward for Best Buy.”

Widlitz said that despite the No. 2 CE player being “wiped off the map” and leaving an estimated $9 billion in sales “up for grabs,” she believes Best Buy’s stock already assumes market share gains and a more rationale retail environment going forward.

“We think it is not unlikely [Best Buy’s] domestic business could be down a high single [digit percentage] for fiscal year 2010,” she said.

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