Best Buy had a dud of a second quarter, as shown by the company's earnings release on Tuesday.
Comparable sales tanked 12.1% from a year ago as cautious, inflation-hammered consumers pulled back on big ticket items like electronics. Gross profit margins fell 170 basis points from the prior year at Best Buy's domestic segment.
"The promotional environment was more intense than last year and even more than we expected entering the quarter, as sales demand softened," Best Buy CEO Corie Barry told analysts on a conference call. "Some areas were quite aggressive from a promotional standpoint, especially where inventory was ample or in excess."
Best Buy's challenges appear to have continued into the third quarter.
The company sees third quarter comparable sales declining more than the 12.1% drop realized in the second quarter. Sales are running down 10% year over year in August, execs said on the conference call. Operating profits are expected to decline at a similar rate as seen in the second quarter.
Amid this backdrop, Citi analyst Steven Zaccone is staying very bearish on Best Buy stock despite the 26% decline so far this year.
Here's what Zaccone had to say.
Price Target: $61
Rating: Sell (reiterated)
Stock Price movement assumed: -18.5%
"We are still cautious on the shares and stay the course at sell. Same-store sales fundamentals are getting worse, the backdrop is getting tougher for the electronics industry, and the building blocks for multi-year margin expansion are somewhat uncertain now that FY25 targets are off the table."
Zaccone's longer-term thinking on Best Buy:
"Best Buy has benefited from stimulus-fueled purchases and work/educate from home demand during the pandemic. We recognize Best Buy is benefitting from a strengthening consumer and increased importance of technology, but we see too many red flags for the model as demand trends moderate — Best Buy is not immune to competitive pricing and increasing promotional activity once demand moderates, comp comparisons get increasingly challenging in a fully “re-opened” environment in FY23, and [Options Expiration] is being recalibrated higher, putting pressure on operating margins in the near to medium term. Simply put, consumer electronics was a category winner from the pandemic and we see risk Best Buy is over-earning in the near term."
The retail industry vibe:
Second-quarter earnings season has been brutal for retailers, headlined by lackluster reports and guidance from Best Buy, Kohl's, Big Lots, Abercrombie & Fitch, Nordstrom, and others.
Several risks confront the sector as investors turn their attention to the crucial holiday season.
First, inventory levels are absurdly too high given sales trends. Second, retailers are aggressively promoting products at the expense of profit margins. And third, the start of the key back-to-school shopping season has been mixed at best (see slow start for Best Buy) as inflation-weary shoppers pull back on certain discretionary spending categories.
From the Yahoo Finance Live archives: a key Best Buy vendor breaks down the environment
Whirlpool CFO Jim Peters told Yahoo Finance Live in late July that the company was dusting off its "recession playbook." This commentary came after a quarter of slowing growth and mixed guidance from the appliance leader.