Big box electronics retailer Best Buy (BBY) announced July 6 that it will lay off 2,400 workers, including 1,800 retail workers and 600 Geek Squad members. This amounts to only 1.4% of its workforce, but will clearly result in some cost savings. We think shares of Best Buy are fairly valued at current levels.
As a product of the mobile computing revolution, as well as the growth of Amazon (AMZN), Best Buy has become a seller of low-margin commodity products. Much like Radio Shack (RSH), Best Buy is attempting to remain relevant by closing unproductive stores and focus on profitable, carrier-neutral smartphone sales. The firm's once prosperous big-box format is now under attack as consumers shift toward purchasing fewer gadgets (since a smartphone can handle so much) and new digital content dissemination.
However, Best Buy remains one of the few places with a product showroom, as well as one of the few brick-and-mortar sellers of DVDs, CDs, video games, and Blu-Rays. Although most of these products are available for lower or comparable prices on the Internet, specifically Amazon, there remains a chance that online sales taxes will be enacted nationwide, eroding some of Amazon's low-cost advantage. If this does occur, Best Buy may be able to better weather the storm and remain in business over the long haul.
Even though we don't think Best Buy is heading into bankruptcy anytime soon, shares are fairly valued at current levels and don't provide investors with a very compelling risk/reward profile, in our view. Shares presently yield in excess of 3%, but we think the company will focus on re-imagining its store base rather than increasing its dividend. The firm also only scores a 3 on our Valuentum Buying Index at this time, so we'd want a larger margin of safety and improved technicals before considering the retailer in the portfolio of our Best Ideas Newsletter.