Citi Remains Cautious On Best Buy Co.'s Earnings Announcement

In a report published earlier today, Citi discusses its thoughts regarding Best Buy Co.'s BBY 4Q earnings, which BBY will report tomorrow before the market opens. According to the report, Citi remains cautious regarding BBY's outlook due to risks to gross margins, lack of positive fundamental catalysts, and competition from non-traditional channels such as discounters, office furnishing retailers, and online platforms. In addition, Citi is concerned about a disappointing FY2012 guidance. Citi believes that there may be a risk of comp deceleration relative to December sales due to poor weather in the early months of 2011 and also higher promotional activity in 4Q. Furthermore, Citi believes that the “most critical aspect of earnings will be the company's FY outlook relative to consensus”, which is at $3.56. As for Citi's own estimates, they have estimates of 4QEPS $1.74 against the street's $1.84. Due to the gross margin pressures from discounting, Citi has an estimate of $3.20 for the year, which is on the low side of BBY's guidance. Using a forward P/E and 10-year discounted cash flow analysis, Citi has values BBY with a price target of $36. However, it rates BBY as high risk due to its highly leveraged balance sheet, volatility, competition, and slowdown in consumer demand, among others. BBY is currently trading at $31.85.