Wedbush: Best Buy To Be 'Overwhelmed By Competition'

November 16, 2014

64

Michael Pachter of Wedbush reiterated an Underperform rating on Best Buy Co Inc (NYSE: BBY) on Monday with an $18 price target.

“Best Buy’s cost structure reflects an estimated 10 percent price disadvantage relative to its online competitors, and we expect continued market share losses this holiday,” Pachter wrote. “We do not expect the company to attract new store traffic for several years.”

According to Pachter, Best Buy’s lower gross profits and negative comps will “trump” the company’s cost-cutting initiatives. The analyst notes that Best Buy has reported year-over-year consolidated gross margin declines in 14 straight quarters and domestic comp declines in 15 of the last 17 quarters.

Best Buy’s gross profits are at a run rate of $3.5 billion below 2010 levels which Pachter describes as a “recipe for disaster” especially when factoring in expectations that Best Buy’s is unlikely to exceed the targeted amounts of $1 billion in domestic cost cuts.

Finally, Pachter expects the iPhone “phenomenon” to be short lived. In addition, when a refresh cycle occurs (such as 4K TV when broadcast shifts to the 4K Standard) price of new products will be close to existing pricing, helping comps “only modestly.”