Best Buy downgraded as consumers tighten their belts amid high inflation

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Best Buy Co. Inc was downgraded to neutral on the buy at Bank of America, which forecasts a slowdown in the consumer electronics category amid skyrocketing inflation and shrinking discretionary spending.

BBY Best Buy,
+0.81%
lowered its forecast when it announced its latest results in May. But Bank of America analysts led by Elizabeth Suzuki don’t think that’s enough.

Bank of America data shows that American consumers are shifting their budgets towards essentials like food and fuel. Fewer respondents to the bank’s quarterly work-from-home survey said they would spend more on home entertainment. And more consumers could return to the office, reducing the need for work-from-home items.

Lily: What 8.6% inflation looks like for the average grocery shopper — bacon is over $7 a pound, cookies are up 49 cents

“[I]f Best Buy’s sales had continued at the company’s pre-COVID five-year average growth rate of 1.6%, FY25 sales would be on track to just about 47 billion, about $8 billion lower than the midpoint of Best Buy’s FY25E guidance range,” analysts said.

“The key message is that consumers are considering tightening their portfolios in discretionary categories.”

Bank of America lowered its price target for Best Buy to $90 from $110.

Best Buy reported a comparable sales decline, which Chief Executive Corie Barry attributed to falling computer and home theater sales when commenting on the results.

“[W]While our earnings drivers were largely in line with expectations, the 8% comparable sales decline was smaller as inflationary pressures intensified throughout the quarter,” Barry said, according to FactSet.

“This trend continued into the start of the second quarter, and it doesn’t look like it will subside in the near term.”

Best Buy stock rebounded 2.2% on Tuesday and has fallen 30% year-to-date.

Also: Concerns about stagflation rise: Americans are increasingly worried about runaway inflation, jobs and the deterioration of their own finances

On the other hand, Bank of America upgraded Tractor Supply Co. TSCO,
+0.85%
buy from neutral based on its non-discretionary goods like feed and tools and the geography of its stores. Bank of America raised its price target by $10 to $260.

“The company has now opened 200 garden centers, which is timely for the summer gardening season, and our quarterly surveys continue to show that lawn and garden projects are the most popular in improving the habitat,” Bank of America said.

“Tractor Supply’s stores are primarily in rural (and to a lesser extent, suburban) markets that have experienced high population growth, not only during the pandemic, but in the decades leading up to it.”

Shares of Tractor Supply rose 1.3% on Tuesday and are down 18.4% for 2022 so far.

Bank of America is also bullish on the home improvement and auto repair sectors, including companies like Home Depot Inc. HD,
-1.76%,
Lowe’s Cos. WEAK,
-2.25%,
and Advance Auto Parts Inc. AAP,
-1.07%,
all rated buy.

And: Two years into the pandemic-era housing market, the outlook for first-time buyers is bleak

“Particularly in the home improvement sector, as housing demand remains high but supply is low, rising home prices are driving a positive wealth effect for existing homeowners,” Bank of America said. .

“Retail spending on home improvement is strongly correlated with home price appreciation, and we continue to expect continued positive year-over-year growth in the category, even after two years of record growth.”

And, analysts say, “if you can’t buy new, fix the old.”

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