Best Buy Co Inc (NYSE:BBY) beat estimates for earnings per share in its report this week, but the electronics retailer continues to post declines in same store sales. As a result, Raymond James say they will not recommend it, but they think downside is limited in this case.

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Best Buy still struggles

In a report dated May 22, 2014, analysts Dan Wewer and Aziz Pirbhoy reiterated their Market Perform rating on Best Buy Co Inc (NYSE:BBY). They note that the retail chain has had declining same store sales in 14 of the last 15 quarters. Gross margins have also been weakening, and management expects the pressure to continue for at least the next two quarters. In addition, they say the addressable market and increasing competition is pressuring gross margin percentages.

However, the Raymond James team says near-term downside risk appears limited. They cite Best Buy Co Inc (NYSE:BBY)’s “depressed valuation” and also the conservative guidance provided by management, which could set the retail chain up for another earnings per share beat.

Best Buy posts slight operating EPS improvement

Best Buy Co Inc (NYSE:BBY) reported first quarter operating earnings of 33 cents per share, compared to 32 cents in the same quarter a year ago. That result included a positive impact of 3 cents per share from the company’s new credit card agreement with Citi. Wall Street had been expecting earnings of 19 cents per share.

The company’s management first guided for a 70 basis point decline in EBIT percentage for the first quarter. However, that was significantly different from the 30 basis point increase actually reported in the quarter. Raymond James analysts say management at the struggling retailer “deserves credit for providing guidance that the company could beat despite the shortfall in sales.”

Best Buy makes progress

Best Buy Co Inc (NYSE:BBY) has continued to make progress in its Renew Blue cost cutting plan. The company pushed its domestic operating expenses $105 million lower and international expenses $56 million lower. The Raymond James team believes that the retail chain’s selling, general and administrative expenses per square foot fell 6.8% during the quarter.

That’s in addition to a 5.6% decline in the same quarter a year ago. They note that no other hardline retailer has been reducing expenses as quickly as Best Buy has been.

But… terrible comps

On the negative side though, the Raymond James analysts say Best Buy Co Inc (NYSE:BBY) had the worst comparative store sales performance in the entire hardline retail sector. Consolidated same store sales fell 1.9% in the first quarter. They say the big problem here is “broad-based,” as domestic same store sales fell 1.2% and international same store sales declined 5.8%.

In addition, they note that Best Buy Co Inc (NYSE:BBY) isn’t commenting on any pay it is receiving from the shop-in-shop agreements it has with a number of its biggest vendors, like Microsoft Corporation (NASDAQ:MSFT), Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG), Apple Inc. (NASDAQ:AAPL) and others. However, they believe the effect from these new agreements has been minimal because of the poor performances in the product categories represented by those agreements.

Updating estimates for Best Buy

The Raymond James team notes that Best Buy Co Inc (NYSE:BBY)’s gross profit comparisons also continued to fall. Gross margins declined 73 basis points year over year. They estimate that the retail chains gross profit comps fell 5% in the first fiscal quarter.

They have now updated their 2015 fiscal year non-GAAP earnings per share estimate from $2.11 to $2.15 per share. That is less than their 12 cent per share beat compared to their model for the first quarter of the fiscal year. As a result, their estimates for the rest of the current fiscal year decline by 8 cents. They say the biggest impact is higher tax rates, especially in the fourth quarter. They don’t think Best Buy Co Inc (NYSE:BBY) will have an opportunity for comparable sales to turn positive and gross margins to increase until the fourth quarter of this year.

As of this writing, shares of Best Buy Co Inc (NYSE:BBY) had increased more than 1% today.