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The Ratings Game: Best Buy stock plunges as high expectations and supply constraints overshadow earnings beat

Best Buy Co. Inc. beat fiscal third-quarter Street expectations, but results were no match for investor and analyst expectations.

Shares of the consumer electronics retailer

plunged 12.5% in Tuesday trading after the company topped profit and revenue forecasts and raised its full-year revenue and same-store sales guidance ranges.

Still, the stock was downgraded to hold from buy at CFRA.

“We reduce our 2022 outlook, as revenue growth is likely to flatten and margins face supply chain risk,” wrote CFRA’s Kenneth Leon in a note.

CFRA cut its price target to $130 from $140.

See: Dollar Tree raises prices to $1.25 and they say it’s not due to inflation

The FactSet consensus is for full-year EPS of $9.38 and revenue of $48.30 billion. For the year, Best Buy is guiding for revenue of $51.8 billion.

Wells Fargo says it isn’t completely surprised by the drop in Best Buy’s shares “considering elevated buy-side expectations, recent share outperformance and a series of more punitive post-Q3 selloffs.”

Wells Fargo rates Best Buy stock equal weight with a $125 price target, down from $135.

“While the Q4 outlook likely proves conservative (per usual), we view a big beat less likely with Oct pull-forward risk and heightened margin pressures appearing likely to bleed into FY23,” analysts wrote.

Margin pressure is expected to come from increased investment, the launch of the Totaltech membership program, and more.

GlobalData offers a reminder that these earnings results come after huge gains during the pandemic. Still, with consumers still focused on home remodeling, there may be some sense that results should have been stronger.

“There is some truth in this and, on a category level, Best Buy’s numbers reflect this trend with a category like appliances up by 10.9% in comparable terms as many more households continue to remodel kitchens,” Neil Saunders, GlobalData managing director, wrote.

“The problem is that this growth is offset by decline in computing sales which represents a significant chunk – around 45% – of the domestic revenue mix. Relative to last year, when consumers were still adapting to working and learning at home, there just isn’t the impetus in computing that there once was.”

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Best Buy admitted to supply shortages, though the company said the impact was low.

“We had pockets of constraints in areas like appliances, gaming, and mobile phones,” said Corie Barry, Best Buy’s chief executive, on the earnings call, according to a FactSet transcript.

“Similar to last quarter, however, we do not believe this materially limited our overall sales growth. While we have faced and continue to face supply chain challenges including delays and higher costs, we are proactively navigating a situation that we have been dealing with for several quarters as our industry has been facing disruptions and supply constraints since early in the pandemic.”

Best Buy stock has gained nearly 21% for the year to date while the S&P 500 index

is up 24.2% for the period.

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