BBY reported better-than-anticipated sales (with both Domestic and International sss above Cons), coupled with a better EBIT margin vs Cons. BBY’s coronavirus impacted 1Q outlook calls for sss of 0% to 1% with EPS of $1.00 to $1.05 (Cons $1.01). For FY20, BBY expects sss of 0% to 2% and EPS of $6.10 to $6.30 (Cons $6.25). Shares were flat vs S&P -1%.
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With concerns over the Coronavirus spreading, we think US Retailers will likely be viewed as near-term relative safe-haven stocks given limited direct exposure to China. However, should the virus spread into a pandemic, especially in China, we see a greater impact to US retailers from indirect supply chain exposure or US GDP growth.
To help gear up for 2020 we analyzed 2019 performance, identified 10 key themes into 2020, analyzed post Q3 earnings reaction, and analyzed the key issue facing each stock under coverage into 2020.
BBY’s 3Q19 results this morning beat on comps, and along with better than expected SGA control drove a ~10% EPS beat vs Consensus. BBY provided 4Q19 EPS which was ~2% above prior Consensus at the mid-point. BBY shares were up ~10% for the day on the beat and raise.
Two weeks ago, we assumed broader coverage of Hardlines and Internet Retail and issued four deep dive reports including a downgrade of LOW to Peer Perform and reiterated HD, BBY, and W at Outperform. We also assumed coverage of AMZN, ULTA, WSM, RH, TSCO, and SHW (see our 1-page tear sheets here). Finally, we utilized the broader coverage as an opportunity to reposition our legacy auto part retail coverage and downgrade AAP to Underperform and upgraded ORLY to Outperform.
Wolfe Research's Senior Hardlines & Internet Retail Analyst Chris Bottiglieri hosted a webcast to discuss his downgrades of AAP and LOW, bottom-up TAM analyses on both home improvement retail and auto parts retail, his valuation black box: what is driving retail valuations, and more.
Today (10/07/19) we are assuming broader coverage of hardlines and internet retail with deep-dive reports on four companies, including a LOW downgrade to PP. We also have two ratings changes from our existing retail coverage (AAP to UP and ORLY to OP), and assuming coverage of six additional retail names with concise 1-page investment tear sheets.
We are reiterating our Outperform rating on Best Buy with an $82 CY2020 price target, implying 23% upside vs. current prices plus a 3% div yield. Our $82 price target is based on 6.5x times our 2021E EBITDA of $3,038M. Our CY20 target multiple implies only a 11.0x cash adj P/E on 2021.
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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