Why this broker downgraded its Best & Less price target (and got surprised)

Bell Potter analysts downgraded Best & Less Group’s (ASX: BST) 12-month price target (PT) on Thursday as the company’s first-half earnings report posted lower sales than 2021. 

Bell Potter has given Best & Less a price target of $1.85.

The price target was formerly $2.05, a downgrade of approximately 10%.

But as of Thursday's early trade, the share price of $1.89 has already surpassed analysts' targets.

So why did Bell Potter downgrade? 

“Changes to earnings and cash flow assumptions see our rounded PT down ~10% to $1.85/share (prev. $2.05/share),” analysts wrote. 

BST pre-reported total sales higher than 2022 but below 2021. 

Sales were up 13% in 1HFY23 vs. 1HFY22, but profits post-tax (NPAT) were down -32% Year-on-year (YOY) at $13.7m.

HOLD rating retained 

Bell Potter still rates BST as a HOLD. 

The analysts see upside potential in the company’s near term earnings growth with an expected revenue growth of approximately 4% for the full FY23. 

Gross margins of 47.4% are expected to return to the targeted 48-50% range through the next two financial years (FY24 and FY25 respectively). 

Cost Of Doing Business (CODB) performance is expected to improve “over the near term.” Analysts see pro-forma operating margins of between 7.3% up to 9.5% “FY23-25.” 

Price target beat 

As for Thursday’s movements surpassing the expectations of Bell Potter, catalysts are ultimately unclear. 

According to Market Index’s broker consensus scan, four brokers rate BST a HOLD while four brokers rate BST a SELL. No brokers in the scan rate BST as a BUY. 

BST's one year chart. As at 11am AEST, shares are $1.885