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Best Buy Slashes Sales Forecast for Q2 & FY23

Story Highlights

Best Buy cut its sales forecast due to rising inflationary pressures. The silver lining is that inventory levels remain almost flat compared to the same period last year.

American consumer electronics retailer Best Buy Co. (NYSE: BBY) has joined a growing number of American retailers to lower their expectations for the second quarter and rest of the fiscal year.

To make things worse, the company has temporarily paused its stock buyback program but will continue to pay the $0.88 per share common stock dividend. BBY stock plunged nearly 10% on the news during after-hours trading but closed the session down 2.3%.

Commenting on the update, Best Buy CEO, Corie Barry, said, “As high inflation has continued and consumer sentiment has deteriorated, customer demand within the consumer electronics industry has softened even further, leading to Q2 financial results below the expectations we shared in May.”

Revised Outlook for Q2 & FY23

For Q2FY23, Best Buy now expects comparable sales to decline by 13%, much lower than its previous guidance of a decline of around 8%. Nonetheless, revenues are expected to be around 7.5% higher than the pre-pandemic levels of the comparable quarter.

Similarly, for FY23, BBY now expects comparable sales to drop by 11%, significantly higher than its previous guidance of a fall of between 3% and 6%.

On the bright side, Best Buy did note that its Q2 ending inventory levels remained more or less the same as the prior-year quarter. This should be a relief for investors as other retailers have resorted to heavy markdowns on piled-up goods, which is further hurting their margins.

Best Buy had warned of waning consumer demand in Q1 and had projected a year-over-year drop in results for Q2. However, the jump in inflationary figures each month is causing more concern for retailers as consumers are pinched for spending. Consumers are paying more for food items and at the gas pump, with very little left to spend on discretionary items like electronics.

Best Buy basked in the glory of high demand for home products and electronics during the pandemic, when stay-at-home mandates forced people to spend more on the comfort of their homes. But times have changed for the worse and consumers are cutting back wherever they can and saving for the much talked about and gloomy recessionary period to set in.

Best Buy is scheduled to report its results for Q2 ending July 30, 2022, on August 30. The company will provide a further update on the full-year forecast in the release.

Analysts Are Cautious about Best Buy

Following the news, Wells Fargo analyst Zachary Fadem stated, “Needless to say, today’s update is disappointing but not surprising considering a host of rising macro concerns (rates, inflation, etc.), elevated channel inventory, and pulled forward pandemic demand.”

Moreover, Fadem slashed the price target on BBY stock to $70 (6% downside potential) from $82 while maintaining a Hold rating. The five-star analyst even cut down FY23 and FY24 earnings per share (EPS) estimates to range between $6 and $6.70 from his previous estimates of $8.60 and $10.20 as he expects the weakness in demand to continue.

“On the category as a whole, interest rates are on the rise, consumer balance sheets less flush with cash and inflation limiting financial flexibility; we expect consumer electronics to face likely pressures in the months/quarters ahead,” Fadem added.

Overall, the BBY stock has a Hold consensus rating based on six Buys, eight Holds, and two Sells. The average Best Buy price forecast of $86.93 implies 16.7% upside potential to current levels. Meanwhile, the stock has lost 25.5% so far this year.

Parting Thoughts

The demand for Best Buy’s products is softening at an accelerated pace, thanks to the growing inflationary pressures. The company has been proactive in cutting down its forecast and warning shareholders of a weak quarter. Best Buy noted, “In response to the current sales environment, the company will continue to actively assess further actions to manage profitability.”

Notably, retailers will continue to face pressure from inflation in the near term. Furthermore, should the U.S. slip into an ugly recession, the pressure will double down. It’s a wait-and-watch story for the sector.

Disclosure

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