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Best Buy (NYSE:BBY) is the largest specialty retailer of consumer electronics in the U.S., with a market share of more than 22%. It competes primarily with Wal-Mart (NYSE:WMT) and RadioShack (NYSE:RSH).

Recent news and data indicate that U.S. consumer incomes are rising faster than consumer spending, suggesting that consumers remain uncertain about the economy. This caution tends to impact discretionary spending on items like consumer electronics, which over time could put pressure on Best Buy’s revenue per square foot (a common retail performance metric) from U.S. stores.

However, we remain bullish on Best Buy’s growth prospects despite the latest consumer spending information. Our analysis follows below.

Circuit City’s demise an opportunity for Best Buy and Wal-Mart

Best Buy estimates that last year’s closure of Circuit City left about $6.5 billion to $7 billion in sales up for grabs. In an effort to drive sales and gain market share, Best Buy is offering competitve pricing and has trained staff to help former Circuit City customers make product choices. But Wal-Mart also has its eye on Circuit City’s customer base, an obvious threat to Best Buy.

Strong outlook for TVs, computing devices, smartphones

In coming years the sales outlook for LCD TVs is expected to improve in North America and other developed markets, according to a recent study by DisplaySearch. Despite the weak economy, consumers remain willing to buy flat panel TVs, albeit in smaller sizes and at lower prices. Overall, increased unit sales are expected to offset declining prices. This year DisplaySearch projects 22% growth in worldwide LCD TV sales, primarily driven by developed markets.

TVs contribute a significant portion of Best Buy’s sales. The company also stands to benefit from the increasing popularity of computing devices like laptops, netbooks, PCs, tablet computers and smartphones. A recent study by Gartner predicted a 22% rise in worldwide PC shipments this year. PCs and other computing devices continue to sell briskly despite the recession because they provide significant value in terms of connectivity, convenience and entertainment.

Initiatives for multi-channel customers

Customers who shop both online and in physical stores are an extremely attractive segment for Best Buy. Compared to single-channel customers, they transact twice as much, spend 95% more and contribute 80% more to margins. In an effort to drive additional sales from multi-channel customers, Best Buy is developing several new web and mobile e-commerce applications.

Bottom line

We predict that Best Buy’s revenue per square foot will grow at an annual rate of 2.5% during the Trefis forecast period. If growth slows to 1.25%, however, that would equate to a 5% downside to our estimate for Best Buy’s stock value. You can modify the chart below to see how changes in revenue per square foot could impact Best Buy’s stock.

Disclosure: No positions

Source: Best Buy: Hampered by U.S. Consumer Caution?