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Best Buy stock: Why Goldman Sachs still has a Sell rating

Goldman Sachs is staying cautious on shares of electronics retailer Best Buy (BBY) ahead of the key back-to-school and holiday shopping periods.

"We have had a Sell [rating] on Best Buy for a while, I think since December 2020," Kate McShane, retail analyst at Goldman Sachs, told Yahoo Finance Live (video above). "And [something] that we highlighted at the time and continue to highlight is that we do think consumer electronics has been more of a beneficiary of people staying at home than not."

McShane suggested that Best Buy is up against tough sales comparisons as people return to work in offices and purchase fewer electronics. The analyst also expressed concerns about the outlook for Best Buy's profit margins.

A shopper exits a Best Buy store during Black Friday sales in Brooklyn, New York, U.S., November 26, 2021.  REUTERS/Brendan McDermid
A shopper exits a Best Buy store during Black Friday sales in Brooklyn, New York, U.S., November 26, 2021. REUTERS/Brendan McDermid (Brendan McDermid / reuters)

"This is not one of the companies that saw huge margin increases during the pandemic," McShane explained. "They kind of stayed within their range. And now this year as we get into a more promotional environment... in addition to the fact that they're rolling out their Total Tech Support business, you are going to see weight on gross margin as well. So there is more risk around the numbers in 2022 than there are maybe for other companies we cover."

Best Buy shares fell 4.6% during trading on Tuesday as of the market close. The stock has underperformed the S&P 500 since late November 2021, according to Yahoo Finance Plus data.

While a large part of McShane's call on Best Buy reflects a hangover from the pandemic work-from-home electronics boom, there are macroeconomic worries brewing as well.

High fuel costs, cash-starved consumers, and rising recession concerns are all mounting challenges for Best Buy and other retailers.

Consumer sentiment has also remained depressed, even if spending hasn't significantly dropped off yet. The University of Michigan's consumer sentiment reading for June hit a record low, and a new survey from Gallup found consumer confidence is at its worst level since the Great Recession. Another consumer confidence measure released by the Conference Board on Tuesday hit a 16-month low and came in below economist estimates.

"Consumers' grimmer outlook was driven by increasing concerns about inflation, in particular rising gas and food prices," said Lynn Franco, senior director of economic indicators at the Conference Board, in a statement. "Purchasing intentions for cars, homes, and major appliances held relatively steady — but intentions have cooled since the start of the year and this trend is likely to continue as the Fed aggressively raises interest rates to tame 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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