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Bearish Stance on Best Buy

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We recently downgraded our recommendation on Best Buy Company Inc. (BBY - Free Report) , the beleaguered consumer electronic retailer, to Underperform with a price target of $16.00, following its dismal second-quarter 2013 results. Earlier, we had a Neutral view on the stock.

Best Buy posted weaker-than-expected second-quarter results. The quarterly earnings of 20 cents a share fell sharply by 49% from 39 cents reported in the year-ago quarter, missing the Zacks Consensus Estimate of 31 cents.

Thus, this slide challenges Hubert Joly, the newly appointed Chief Executive Officer, with the Herculean task of completely revamping the operations. Best Buy also suspended its future share buyback program and is abstaining from providing earnings projection for fiscal 2013 due to the uncertain environment related to product launches and industry wide sales.

On the other hand, we believe that the company’s disappointing results may strengthen the position of Richard Schulze, the former Chairman and founder of Best Buy, who has been advocating a buyout proposal.

Best Buy’s total revenue dropped 2.8% year-over-year to $10,547 million, and also fell short of the Zacks Consensus Estimate of $10,634 million. Comparable-store sales declined 3.2% during the quarter. The company has long been struggling with dwindling sales in key categories including televisions, notebooks, digital imaging and gaming devices, which in turn, is taking a toll on the company's same-store sales results.

Moreover, heightened competition from online retailers like Inc. (AMZN - Free Report) , is adversely affecting its sales and profitability as the online retailers are gradually encompassing new merchandise categories under their purview and offering huge discounts on products with free shipping services to attract customers.

Soft domestic and international sales performance that weighed upon the company’s results, kept analysts on the back foot. Additionally, analysts remained concerned about the tough economic environment in Europe and China and weak sales in Canada.

Moreover, secular headwinds and falling comps compelled analysts to lower their estimates. Further, Best Buy’s cash position plunged 67.3% at the end of the quarter, which is of grave concern.           

The above analysis supports our unbiased view, and advocates our bearish opinion on the stock.

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