Best Buy

 

Retailer Best Buy Co., Inc. (NYSE:BBY) has been going through troubled times. Its last earnings report was disappointing, with a miss on estimates and profits falling 52 percent from last year on revenues that declined 3 percent. The retailer suspended its stock repurchase program and also refused guidance for the balance of the year. A new CEO is soon to take charge. An earlier negotiation for the sale of the firm to founder and former chairman, Richard Schulze, fell through.

Piper Jaffray is of the opinion that Best Buy Co., Inc. (NYSE:BBY)’s troubles could work to the advantage of Amazon Inc. and add 2% to its 2013 revenue growth estimate of 28%. Best Buy has already exhibited a weakening sales trend and this could exacerbate due to further closings of stores down the line. If Amazon.com, Inc. (NASDAQ:AMZN) captures even half of Best Buy’s lost sales (estimated at 5%) that could translate to a $1.2 billion sales gain for Amazon.com, Inc. (NASDAQ:AMZN).

Further, Best Buy Co., Inc. (NYSE:BBY) witnessed margin pressures during the last quarter, due to problems in smartphones, higher marketing expenses for PCs, and mix problems in TVs. These issues are likely to impinge equally in Q3, and are primarily caused by Amazon.com, Inc. (NASDAQ:AMZN) and Apple Inc. (NASDAQ:AAPL).

Piper Jaffray has an Overweight rating on Amazon and a price target of $260.00, representing a 55 times multiple of 2013 EPS of $4.70 and $1 per share cash. Investors should be cautious buying a stock at a premium that high. Furthermore, risks include state Internet sales tax collection legislation, slowing consumer spending and eCommerce growth, gross margin compression, competition, and FX changes.

For its second quarter, Amazon.com, Inc. (NASDAQ:AMZN) reported sales of $12.8 billion, higher by 29 percent, while earnings were only $7 million, a penny a share. These matched expectations. The low profitability on fast growing sales is a regular feature in Amazon’s earnings reports. But analysts say the low profits in fact, represent an investment in the future, and that the sales growth would eventually spell doom for physical stores.

This is exactly the point Piper Jaffray is making in the above cited research.

Piper Jaffery sums it up perfectly by stating:

Consumer tech spending continues to shift to mobile devices, an area in which Best Buy has lower market share. Best Buy’s July quarter was negatively impacted by a number of areas including weak sales and gross margins in the Domestic segment and a very weak sales trend in the International segment.