Wedbush analysts Michael Pachter, Nick Citrin and Nick McKay maintain an Underperform rating for Best Buy Co., Inc. (NYSE:BBY) as the company will announce Q4:14 results on Thursday, February 27.

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Best Buy Co., Inc. (NYSE:BBY) will report fiscal Q4:14 results before market open on Thursday, February 27, and will host a conference call at 5am PT.

Q4 revenues and earnings are likely to be in line with our estimates, revised after Best Buy released holiday sales results in January. We estimate revenue of $14.8 billion and EPS of $1.06, vs. consensus for revenue of $14.7 billion and EPS of $1.01. We expect total comps of down 0.7% (domestic down 0.9%, international up 0.1%).

Best Buy’s holiday sales results

Best Buy Co., Inc. (NYSE:BBY)’s holiday sales results (9-weeks ending January 4) were poor, with comps down 0.8% (down 0.9% domestically, up 0.1% internationally). Domestic growth in computing, appliances and gaming were offset by declines in digital imaging, movies, and MP3 players. International revenues were down on store closings and negative FX, but comparable-store sales were slightly positive.

The domestic comps declines were attributed to the promotional environment, supply constraints for tablets and mobile phones, significant store traffic declines, and a disappointing mobile phone market. The NPD Group said revenue for the CE industry was down 2.4%; Best Buy’s CE domestic comp of down 6% implies to us market share losses to online competitors.

Q4 operating margins to decline

Best Buy Co., Inc. (NYSE:BBY) expects Q4 operating margins to decline 175 to 185 basis points year over year, and expects further operating margin declines in each of the next three quarters. The degradation in Q4 margin was likely due to discounting to defend market share, and price competition is likely to continue. We expect Walmart and Amazon to continue to exert pricing pressure, especially at holiday.

Management pointed out the “bright spot” that Internet sales were up roughly $200 million, while overall domestic sales declined by roughly $150 million. This implies that overall store-level sales declined $350 million during the holiday period, triggering massive deleverage. This is not a bright spot, in our view.

Best Buy’s valuation

We are reiterating our underperform rating and 12-month price target of $18. Our target is based on an EV of 10x sustainable free cash flow, reflecting expected negative comps in 2014, further margin erosion, low visibility, lack of guidance, and doubts about the sustainability of Best Buy Co., Inc. (NYSE:BBY)’s turnaround plan. We expect comps declines to continue, and we expect price matching to continue to pressure margins. Lower margins could pressure Best Buy’s cash flow multiple.