A person enters a Best Buy store in Manhattan, New York City, U.S., November 22, 2021.
A person enters a Best Buy store in Manhattan, New York City, U.S., November 22, 2021. Reuters / ANDREW KELLY

Expectations are running low for electronics retailer Best Buy Co Inc's quarterly earnings on Tuesday after results from two major industry players showed Americans were balking at big-ticket purchases due to decades-high inflation.

At least five brokerages have cut their price targets on the company's stock in the run-up to earnings, with some citing the surprising scale of the impact that price pressures have had on consumer spending.

"Inflationary pressures are weighing on discretionary purchases, particularly among low-income consumers. There was also a material shift in consumption from goods to services and demand for large ticket items appear to have suffered the most from this shift," said Jason Benowitz, senior portfolio manager at Roosevelt Investment Group.

"We believe these trends are likely to weigh on Best Buy's results and outlook when it reports," he added.

Retail behemoths Walmart Inc and Target Corp reported earnings last week that missed expectations by the widest margin in at least five years.

THE CONTEXT

Industry executives have said consumers were prioritizing essentials and shunning electronics in the inflationary environment, potentially spelling bad news for Best Buy which makes money by selling iPhones, flat-screen TVs and laptops.

The company also faces pressure from ongoing supply issues with in-demand products such as Sony Corp's PlayStation, which in part prompted brokerage Telsey Advisory Group to deliver a steep $40 cut on its price target to $90.

Best Buy's first-quarter sales are expected to fall 11% to $10.41 billion, while its profit is expected to decline fall 28% to $1.61 per share, according to IBES data from Refinitiv.

Graphic: Best Buy's quarterly sales to decline as inflation pinches consumers' pockets -

img

Still, analysts expect the company's shares to have a muted reaction to possible poor earnings due to their 16% plunge last week.

"We believe investors may have gotten ahead of the company and Wall Street analysts by pricing in a downward revision to earnings expectations ahead of the quarterly report," Benowitz said.

THE FUNDAMENTALS

Graphic: Best Buy underperforms S&P 500 - https://fingfx.thomsonreuters.com/gfx/mkt/byprjdqjzpe/Best%20Buy.png

* Best Buy has exceeded quarterly profit estimates for five straight years, although it has missed Wall Street expectations for revenue two times in the past five quarters.

* The company in March forecast for fiscal 2023 adjusted earnings per share of $8.85 to $9.15 and a decline in comparable sales of 1% to 4%.

WALL STREET SENTIMENT

* The current average rating of 29 analysts is "hold", with only two analysts having a "sell" or lower rating.

** The median price target (PT) is $114, down from $130 a month earlier, with seven brokerages reducing their PTs on the stock just this month.