Best Buy's Execution Continues To Improve, Yet Maturing 4K TV Cycle Could Weigh On Q4

Jefferies lauded the improving execution of Best Buy Co Inc BBY as it recorded $0.15 third-quarter EPS beat as disciplined promotional strategy led to a 69 basis point upside in gross margin.

U.S. Comp Sales Improvement, 4K TV Concerns

The improvement in U.S. comp sales to 1.8 percent comp (expectations +1.0 percent) was driven by a 24.1 percent rise in online sales. The brokerage also pointed out that brand consolidation in Canada has also helped with less internal competition.

However, analyst Daniel Binder maintains his Hold rating on the stock, as he is concerned with the maturity of the 4K TV cycle and its negative impact on the fourth quarter.

“[O]ur main concern lies with the maturing 4K TV cycle, which has experienced faster ASP compression than prior cycles. This presents greater sales and margin risk in Q4 versus prior years as product is more widely available among retailers,” Binder wrote in a note.

Samsung Fallout

Meanwhile, Best Buy pegs the top-line impact of the recent recall of Samsung Note 7 at about $200 million and it sees fourth quarter revenue of $13.4 billion–$13.6 b billion, which includes this estimated revenue shortfall.

“Our limited checks suggested consumers may be seeking alternative android phones like the Edge 7 or Google Pixel, so we would not be surprised if management’s estimate on this issue proves conservative,” Binder highlighted.

Price Target And Recent Performance

Binder also raised his price target on Best Buy shares to $42 from $36.

Shares of Best Buy surged more than 13.5 percent Thursday on the third-quarter results and touched a new 52-week high of $46.72. On Friday, shares opened lower, and at last check, they fell 2 percent to $45.02 due to possible profit taking from investors.