Retailer becomes latest to badly whiff on profits as recession fears rise

Retailer becomes latest to badly whiff on profits as recession fears rise

Best Buy has become the latest big-name retailer to badly overestimate consumer demand as recession fears mount and shoppers pullback on discretionary purchases.

The electronics retailer slashed both its second-quarter and full-year financial forecasts late Wednesday, sending shares lower by 4% in after-hours trading.

Best Buy’s downward revisions are tough on the eye to say the very least:

  • 2Q Same-Store Sales: -13% (previous: about -8%)

  • 2Q Operating Margin: 3.7% (vs. 6.9% in second quarter of last year)

  • Full Year Same-Store Sales: -11% (previous: -3.6% to -6%)

  • Full Year Operating Margin: 4% (previous: 5.2% to 5.4%)

What’s more, Best Buy said it would end the second quarter with inventory levels flat versus a year ago despite a sharp pullback in same-store sales. Such an unbalanced ratio of inventory to sales suggests Best Buy could experience stiff margin pressure well into year end as it marks down slow-moving inventory.

To be sure, Best Buy isn’t alone in retail land taking on heavy fire as the economy has slowed.

The world’s largest retailer Walmart also slashed its second-quarter and full-year profit outlooks late Monday owing to rampant inflation and a consumer retrenchment for discretionary items such as apparel. Walmart now sees full-year earnings tanking 11% to 13% compared to a prior estimate for a 1% drop.

In a pre-announcement of its own, grill-maker Weber said it badly missed second-quarter earnings expectations this week.

Bath & Body Works also warned last week it would see earnings come in below consensus estimates as consumers queened in their spending.

Walmart’s primary rival Target kicked off concerns about the retail sector’s health in June with a shocking decision to liquidate massive amounts of slow-moving inventory and take a more cautious view on near-term profits.

Other retailers such as RH, Bed Bath & Beyond, and Kohl’s have issued more cautious outlooks as consumers shift spending away from discretionary categories.

“There is this pivot happening from discretionary and general merchandise into necessities,” Jefferies analyst Stephanie Wissink said on Yahoo Finance Live. “The household is having to make discriminate decisions every single week about funding that inflation.”

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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