Best Buy (BBY) To Face Difficulties Ahead, Such as Gross Margin Compression

Best Buy (BBY) posted strong Q1 results yesterday, but investors were unimpressed and worried about what lies ahead in a post-tax-rebate world. For example, Deutsche cut its target to $48.

Strong quarter, but outlook less certain:

Best Buy’s comp acceleration in a very difficult consumer environment is remarkable and a testament to strong leadership and management, as well as some favourable product cycles. But, we temper our enthusiasm with some concerns regarding gross margins, both this quarter, and for the year, as well as increased competition.

A number of successes in the quarter:

BBY is clearly taking share from other specialty retailers driven by a strong, grass roots effort by store managers to capture incremental sales.

Margins are our biggest concern:

…gross margin, which was down 20 bps this quarter may decline further, particularly as margin comparisons become more difficult. In particular, we are concerned that flat panel margins may compress in the back half as supply outstrips demand. Increasing competitive pressures from mass channels could also pressure…

Deutsche maintains HOLD on Best Buy (BBY), target from $49 to $48

See Also:
Best Buy (BBY) Blows Away Estimates on Tax Rebates. But What Now?
Best Buy (BBY) Gets Rebate Steroid Shot: Don’t Be Fooled–Won’t Last
Best Buy (BBY) Could Get Crushed By Wal-Mart (WMT)

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