Best Buy Co cut to neutral as summer slowdown approaches

With the seasonally weak summer period for retail stocks approaching, names like Best Buy Co. Inc. appear vulnerable to softer sales

The retail sector has received a lot of attention from investors looking for a play on lower gasoline prices. But with that trade looking crowded, and also the seasonally weak summer period for retail stocks approaching, names such as Best Buy Co. Inc. appear susceptible to softer sales.

It’s already been a slow begin to 2015 for the big-box electronics company, which is one reason why Best to buy was downgraded to neutral from overweight at J.P. Morgan on Friday. Analyst Christopher Horvers, who also cut his price target on the stock to US$40 from US$45, anticipates further uncertainty as well as Buy faces tough comparables within the second half of the season.

“We believe sales are off and away to a slow start to the year with TV shipment data slowing and Census sales at electronics and appliance stores turning negative,” Horvers told clients.

He expects this will raise investors’ concentrate on the second half of the season, and the fourth quarter particularly since it accounts for 57 percent of Best Buy’s earnings.

The television sales cycle hit an inflection reason for Q2 as comps were positive for the first time since early 2010. It further accelerated and generated 11-per-cent growth in the domestic electronic devices category, which taken into account 33 per cent of Best Buy’s product mix in Q4.

The highly-anticipated iPhone 6/6S launch late in 2014 also have boosted domestic same-store sales by 200 basis points in Q4, serving to offset slowing tablet sales.

The company’s proceed to close its Future Shop stores in Canada is anticipated to boost EPS by approximately six cents U.S. for every of the next four quarters, but Horvers believes the potential risks associated with a crowded retail sector – mostly driven by a rotation-led revaluation – and the historically weak summer period for retail stocks, warrants more cautious on names that don’t have comp sustainability or upside.

These factors possess the analyst visiting a lid on Best Buy’s valuation before the all-important fourth quarter.

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