Best Buy report strong 2Q EPS before the market opened on 8/29 and raised guidance, however the sales outlook was a bit muted and there remain concerns around the impact from tariffs specific to the company, but also in relation to consumer demand. This, we believe, led to a selloff in the equity. With that said, our research suggests the company remains a unique operator, as it is one of the only companies with a national footprint to showcase the plethora of new devices and technology slated to come to market over the next 12-36 months. Further, the company continues to invest in its service offerings through acquisitions, partnerships, and programs such as Total Tech Support. Taken together, we believe BBY is setting itself up for sustainable, long-term growth. With valuation attractive, in our opinion, Best Buy remains one of our top long-term ideas and we are reiterating our Outperform rating.
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Our Walmart CPG price tracker through last week shows a continuation of price cuts, especially in Food. Our Food basket is flat sequentially and down 1.1% y/y, while our HPC basket is down 0.3% sequentially and up 0.9% y/y. For U.S. based food companies, we continue to see risk around the pricing environment if Walmart reinstates a new round of price cuts.
Tariffs continue to be a tax on U.S. consumers and no sector, company, or consumer is likely to be untouched. Indeed, with List 4 of tariffs being brought into play this past week and the market’s sharply negative reaction, we wanted to take a look at the potential impact it would have directly on consumers and companies’ sales. Tariffs are effectively a tax on U.S. consumers/companies and could result in lower spending although some sectors will be more impacted than others according to our research. Based on our prior research around consumers’ marginal propensity to spend (here) coupled with a sensitivity analysis around average tariff rates and the amount of which are borne by the consumer, it appears housing, transportation, food away from home and entertainment (electronics) could face the most significant pressure.
Topics this weekend…
Hardline Happenings – 1) Hardline Retailers’ sales have likely been impacted by abnormally high levels of rainfall in 2Q19, 2) housing-related data could improve going forward, and 3) TSCO and SHW earnings previews
Quote of the Week – PPG Industries (PPG, Not Covered) CEO, Michael H. McGarry, on pricing actions
Topics this weekend…
A to Z – 1) Amazon ups the ante with Prime Day this year as it looks to highlight its Prime membership offering during the two-day event, and 2) Amazon to retrain 100,000 workers to keep up with new tech changes.
Walmart’s World – Walmart continues to expand its rollout of NextDay to better compete
Quote of the Week – Pepsi (PEP, Not Covered) CEO, Ramon Laguarta on pricing and category trends
Topics this week…
Consumables Corner – 1) The golden age of private label continues to grow, and 2) Longer-term structural threats to the Food Retail industry persist
Quote of the Week – AMZN is aggressively pushing Whole Foods through Prime Day promotions now through July 16th (the second and last day of Prime Day this year)
In case you missed it, on Thursday we sent out our monthly Notes from the Road report and Shots from the Shelf Video Brief and Presentation where we highlight trends we have been seeing on the ground during our store visits around the country. Topics include the continued pressure facing CPG from Private Label and our view on Walmart's current pricing trends. We also go over other topics including the United Natural Foods and Amazon relationship, the difficulties facing the pharmacy business for grocers, Home Depot's drive for efficiencies, Best Buy's Outlet areas of the store, and Amazon's expansion of pick-up/drop-off locations with Kohl's and now Rite Aid. Given it is summer, we used popular summer movie quotes in the presentation to draw out the point of each slide…see if you can get all the movies that are quoted.
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