Best Buy: A Retail Titan
Summary
- Best Buy exhibits a number of business advantages.
- The stock is more competitively advantaged than retail peers.
- BBY remains a great long-term holding, but in the short term, the stock elicits a hold recommendation due to economic uncertainties.
Source: Google Images
Down 20% over the past year, Best Buy (NYSE:BBY) demonstrates investment intrigue as a result of the company's discounted valuation, compelling dividend yield of 3.04%, healthy financials, and attractive value proposition. Driven down by online retail competition from Amazon (AMZN) and slight revenue contraction, past investor sentiment on BBY has not been very optimistic. This article will offer an investment analysis of BBY; discussing the company's financials, dividend, business strengths, valuation, and growth trajectory.
Investment Thesis
Best Buy remains one of the most formidable names in the consumer electronics retail space. BBY has successfully weathered the rise of Amazon and other online retail competitors due to the company's competitive pricing, personalized store buying experience, and online integrations. With $42 billion in annual revenues, BBY remains one of the largest multi-channel consumer electronics retailers with stores in the U.S., Canada, China, and Mexico. The company boasts 1,500 physical store locations in the United States and operates the seventh largest online retail e-commerce platform. Such significant geographical diversification and prominent online sales presence enable the company to cater to a broader consumer base, appealing to both online and in-store buying customer tendencies. BBY offers a very extensive selection of consumer electronic items, ranging from digital hardware, tech devices, game systems, video games, computers, cameras, home appliances, and tech devices.
The company's concentration in the consumer electronics segment offers advantageous brand differentiation as high-priced consumer electronic items afford better profit margins and are readily demanded by consumers. Today's modern day society brings with it an insatiable infatuation with technology-related items. Revenue opportunities within the highly demanded consumer electronics sector are poised for substantial upside, as over the next five years, the current revenue pool of $331 billion in consumer electronics spending is expected to increase to $430 billion by 2023. Increased demand for consumer electronics will arise from elevated disposable income, prolific recreational gaming, an increasing working population, and expanding middle class. From voice assistants, smartwatches, next-gen video games, smart appliances, Bluetooth headphones, smartphones, and smartphone accessories, Best Buy provides consumers with every conceivable electronic item.
In addition to a concentrated but diverse consumer electronic product line, BBY benefits from entrenched brand loyalty and a solid reputation. The company's trusted blue and yellow color scheme is synonymous with consumer electronic purchases, making Best Buy often the first destination for consumers looking to make both large and small electronic purchases. When making significant purchasing decisions ranging from TVs, phones, or gaming systems, customers are more inclined to buy items in the store to determine which products best suit their needs before expending significant amounts of money. In this way, consumer electronic purchases are more resistant to online market share erosion.
BBY is also able to capitalize on human interactions with customers. The company's knowledgeable sales personal help customers make more informed decisions, making an otherwise intimidating and frustrating buying process more simplistic in nature. BBY offers a similar buying experience to that of Home Depot (HD) or Lowe's (LOW) in which customers return to the store in order to obtain valuable purchasing insights from store employees.
Furthermore, under CEO Hubert Holy, BBY has implemented an extensive turnaround initiative. The company has implemented various cost optimization initiatives ranging from reducing administrative and input expenditures to shuttering unprofitable stores. Given that BBY maintains such a significant store presence, it was beneficial for the company to streamline its brick and mortar store presence and exit from unprofitable locations. Another issue facing the company involved customers simply looking at items in the store before purchasing them from online retail competitors at cheaper prices. In response to this, management pursued various cost reduction initiatives to allow BBY to remain price competitive. As a result, BBY now offers a price match guarantee, allowing the company to match the online consumer electronic pricing of other retailers. This, in turn, prevents consumers from window shopping in BBY's stores and allows for greater extraction of revenues. In addition to cost initiatives, BBY also reorganized its shipping operations so that customers would receive packages from the company's 1,000+ store locations. BBY's renewed package distribution system allows for even faster delivery times enabling the company to better compete with AMZN, specifically on AMZN's two-day shipping guarantee.
Following the execution of BBY's "Renew Blue" initiative, BBY has outlined a new strategy entitled "Best Buy 2020" in which the company seeks to drive growth through the expansion of its retail business through consumer-oriented services and solutions. BBY intends to accelerate growth in Canada and Mexico, better execute in key areas, and implement further cost optimization strategies to increase operational efficiency and profitability.
Financials, Dividend, Valuation
BBY displays operational health and financial stability. The company exhibits positive shareholder equity, $3.3 billion in available liquidity, and the company has witnessed gross and net profit margin expansion. Revenues had trended up in an almost linear fashion for two decades; however, the rising popularity of AMZN resulted in temporarily negative revenue implications due to entry of another competitor. In spite of this, BBY's revenues have gradually recovered and will continue to trend upwards as a result of positive secular trends and increased operational efficiencies. Furthermore, BBY offers a compelling dividend yield of 3.04%, and the stock is undervalued based on future cash flows. BBY's current share price of $59.24 is below the company's future cash flow value of $75.60, making for a good value proposition.
Data by YCharts
Final Determination
Best Buy remains a well-managed and competitively advantaged company. BBY exhibits a number of desirable characteristics ranging from financial health, a solid dividend, good operational oversight, a defensive business, and good long-term growth prospects. Although I am currently long BBY, I would issue a temporary hold recommendation for prospective investors with a shorter time horizon. If the U.S economy deteriorates, it will have particularly negative implications for BBY as the company's expensive electronic items would be detrimentally affected by falling consumer discretionary income. In spite of this, on a long-term investment time horizon, BBY is poised to do exceptionally well.
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Analyst’s Disclosure: I am/we are long BBY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (16)
www.gurufocus.com/...
I am cautious in an economy that tells us people are demanding for less tech-products.
Apple’s missed earnings and trade talks may worsen for tech through a 25% tariff. If Apple is finding it hard to attract foot traffic then I must infer that consumers aren’t just spending less at Apple but other publicly traded retail tech suppliers. If they can make up returns in their home improvement business and diversify they may be a great buy. Yet my short- term and considerably long term position in tech is short because of the consumer data reporting long term negative growth in the electronics industry. www.google.com/...They’d have to innovate a new cash cow to support the facts which say consumer spending is falling and that the margins are thinning. The three quarters out rule of purchasing equity for myself in the marketplace is evaluating through their projected growth & right now we do not have growth.
Best Buy cannot make up earnings without innovating new revenue opportunities. In absent of that new cash cow product I believe we will see a Sears and Toy’s R Us trend into 2019-2020 for Best Buy’s stock price. Hubert Joly, CEO, sold his shares at $69/ share. Into 2020 brick & mortar stocks must repay their lenders. This significant loss of operating income effects the value of the stock. This bubble as economists believe will be caused by corporate debt.
The ‘Corporate Debt Crisis’ I must refer to Ray Dalio and believe for myself that Best Buy is seeing falling margins through discounting TV’s and tech products. This decline in margins will have investors selling the stock as their current valuation does not reflect the next 3-9 months of their businesses growth. Their overvalued at 15 x earnings.www.businessinsider.com/...Best Buy has an overwhelming 43% debt to equity reality to face. In a recessionary slowdown we look to answer the problem in the economy. 2000, a tank in tech stocks that had no tangible value. 2007 the mortgage bubble.
The theory and reason for slowdown bear activity lies in this ‘bubble of corporate debt.’
