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Best Buy profits improving due to strong Nintendo Switch console sales: Analyst

  • Jefferies raises its sales and earnings estimates on Tuesday for Best Buy's fiscal second quarter, citing strength in the video game, appliance and smartphone categories.
  • Its shares rose 42 percent year to date through Monday versus the S&P 500's 8.5 percent return. The SPDR S&P Retail ETF declined 13.9 percent in the same time period.

Game enthusiasts and industry personnel walk past the Nintendo Switch exhibit during the Electronic Entertainment Expo E3 on June 13, 2017 in Los Angeles.
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Game enthusiasts and industry personnel walk past the Nintendo Switch exhibit during the Electronic Entertainment Expo E3 on June 13, 2017 in Los Angeles.

Outperforming brick and mortar retail stocks are a rare breed in the age of Amazon.

Best Buy shares are surging this year and one of the reasons why is the successful Nintendo Switch console launch, according to one Wall Street firm.

Jefferies raised its sales and earnings estimates on Tuesday for Best Buy's fiscal second quarter, citing strength in the video game, appliance and smartphone categories.

"Based on our field checks and other research, we believe Best Buy should be able to grow domestic SSS [same-store sales] at the high end or better than mgmt.'s plan," analyst Daniel Binder wrote in a note to clients. "We expect Best Buy to benefit from strength in appliances and connected home, however we also expect robust growth in entertainment from the introduction of two gaming consoles in Q1 and mobile to benefit from a full quarter of Samsung S8/S8+ availability."

Best Buy stock rose 42 percent year to date through Monday versus the S&P 500's 8.5 percent return. The SPDR S&P Retail ETF declined 13.9 percent in the same time period.

Binder cited strong sales of the Nintendo Switch console, which launched in March. Best Buy's July quarter benefited from a full three months of Switch revenue.

"We believe that Best Buy's entertainment category saw a second consecutive quarter of robust growth driven by the launch of the Nintendo Switch and the 1TB PlayStation Slim Gold console as the company laps fairly significant comparable store sales declines in this category," he wrote.

As a result, the analyst raised his July quarter Best Buy U.S. same-store sales growth estimate to 2.5 percent from 2.0 percent. He also increased his earnings-per-share forecast for the same quarter to 66 cents from 59 cents versus the Wall Street consensus of 63 cents.

Even though current sales trends are improving, the analyst isn't ready to upgrade his rating for Best Buy yet.

Binder reiterated his hold rating for Best Buy and his $60 price target, representing 1 percent downside from Monday's close.

"Our biggest concern for Best Buy has been the commoditization of 4K TV and the potential drag on SSS as that large category continues to mature," he wrote.

Best Buy's shares are roughly flat in Tuesday's premarket trading. The company is slated to report second-quarter earnings on Aug. 29.