The Ratings Game: Best Buy downgraded as consumers tighten their belts amid high inflation

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Best Buy Co. Inc was downgraded to neutral from buy at Bank of America, which forecasts a slowing consumer electronics category amid sky-high inflation and a pullback in discretionary spending.

Best Buy
BBY,
+1.64%

lowered its guidance when it announced its most recent earnings in May. But Bank of America analysts led by Elizabeth Suzuki don’t think it’s enough.

Bank of America data show that U.S. consumers are redirecting their budgets toward essentials like food and fuel. Fewer respondents to the bank’s quarterly Home Work survey said they would be spending more on in-home entertainment. And more consumers could be heading back to the office, reducing the need for work-from-home items.

Read: 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 sales had continued at the company’s pre-COVID five-year average growth pace of 1.6%, FY25 sales would be on track to reach only about $47 billion, about $8 billion below the midpoint of Best Buy’s FY25E guidance range,” analysts said.

“The key message is that consumers are planning to tighten their wallets in discretionary categories.”

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

Best Buy reported a comparable sales decline, which Chief Executive Corie Barry attributed to slumping computer and home theater sales during her earnings call commentary.

“[W]hile the drivers of our results were largely as expected, the comparable sales decline of 8% was on the softer side as inflationary pressures heightened throughout the quarter,” Barry said, according to FactSet.

“That trend has continued into the beginning of Q2, and it does not appear that it will abate in the near term.”

Best Buy stock rallied 1.6% on Tuesday, and has tumbled 30.5% for the year to date.

Also: Stagflation concerns mount: Americans are increasingly worried about red-hot inflation, jobs and their own deteriorating finances

On the other hand, Bank of America upgraded Tractor Supply Co.
TSCO,
+0.07%

to buy from neutral based on its non-discretionary merchandise like livestock feed and tools and the geography of its stores. Bank of America raised its price objective $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 lawn and garden projects as the most popular within home improvement,” Bank of America said.

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

Tractor Supply shares closed Tuesday nearly unchanged and are down 19.5% for 2022 so far.

Bank of America is also upbeat about the home improvement and auto repair sectors, including companies like Home Depot Inc.
HD,
-1.59%
,
Lowe’s Cos.
LOW,
-1.83%
,
and Advance Auto Parts Inc.
AAP,
-0.41%
,
all rated buy.

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

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

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

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

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