Best Buy: Set To Thrive

Summary

• Best Buy is set to thrive as the company moves beyond the big comp sales boost.
• The retailer has massive cash flows and a strong cash balance to repurchase outstanding shares at a fast clip.
• The stock is cheap with a 10 PE and a net payout yield topping 10%.
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The retail sector took a massive hit to end 2021 as some initial retail sales numbers panicked the market, yet retail sales rebounded strong for the holiday period. Best Buy (NYSE:BBY) is poised to see a big rally with growth boosted by large share buybacks of a cheap stock. My investment thesis remains Bullish on the electronics retailer stock.

Cheap Valuation

Retailers face an uncertain time period entering 2022 with the impact from COVID-19 pull forwards in the electronic space leading to some possibly soft sales this year. Best Buy saw sales peak back in FQ1'22 when revenues surged 36% on the backs of comp sales growing 37%.

The current year will face a tough time topping these numbers beginning in the soon to start April quarter. What appears evident at this point is that Best Buy isn't going to see much of a sales give-back. In such a case, the stock is substantially cheap.

Best Buy slumped from a high of $142 in late October to $105 now. The nearly $40 dip in the stock price alleviates any valuation questions considering the tough comps hurdle this year. Best Buy had the following comps in the last two years:

• FQ4'22: -1.0%E
• FQ3'22: +2.0%
• FQ2'22: +20.0%
• FQ1'22: +37.2%
• FQ4'21: +12.6%
• FQ3'21: +22.6%
• FQ2'21: +5.8%

While these numbers were impressive, Best Buy has only seen revenues grow 10% annually in the last couple of years. The electronics retailer saw a boost in computer related sales due to the lockdowns, but the whole business didn't see the same level of boosts. The company forecast FY22 sales reaching $52 billion.

Data by YCharts

Due in part to the pandemic pushing forward online and delivery capabilities, Best Buy is a vastly different retailer now. The company reported some impressive stats along with the October quarter to top a touch comp. quarter last year. Based on this statement from the CEO, Best Buy is no longer donating market share to online retailers and, in fact, could be reclaiming market share due to strong omnichannel capabilities:

During the third quarter, we reached our fastest small-package online shipping times ever as our same-day delivery was up 400% and we nearly doubled the percent of products delivered within one day compared to last year.

The ability to buy online and pick up at the store or have the product delivered within one day sets Best Buy up for a bright future and virtually eliminates the need to shop at online places not offering these options.

Stock Buyback Boost

After the COVID-19 lockdowns caused a massive pullback on capital returns, stock buybacks returned in full force to end 2021. Best Buy can now repurchase 10% of the outstanding stock on an annual basis, with Best Buy trading at only 11x 2022 EPS estimates topping $9.

Data by YCharts

The net payout yield is a combination of the dividend yield and the net stock buyback yield. Best Buy offers a 10.7% net payout yield with the dividend yield sitting at 2.8%, leaving the buyback yield at ~7.9%.

In addition, Best Buy has already spent $2.25 billion on capital returns YTD. The retailer has bought $1.7 billion worth of shares and spent $522 million on dividends. With a market cap of $25.4 billion, the buyback yield could easily rise with a big buyback during the January quarter now that the stock has collapsed below 2021 levels. Best Buy has $3.5 billion in cash, plus the strong cash flows from the holidays to repurchase shares and only a debt load of $1.2 billion.

The revenue targets are for mostly flat revenues over the next few years, suggesting analyst EPS targets are far too low. If the company can reduce the share count by 8% annually, Best Buy can produce a substantial boost to EPS without any cutbacks in electronics spending in FY23 (January).

The guidance for FQ4 and all of FY22 includes SG&A costs up somewhere around 8% to 9%. SG&A is only ~18% of revenues, so the sizable boost to operating costs only factors to an ~1% hit to operating income targets.

Takeaway

The key investor takeaway is that 2022 could be a volatile year in the retail sector. The company has already reported a quarter with minimal comps, though Best Buy is likely to hit a few quarters with negative comp sales. Higher operating costs are another problem, but the business model has limited impact from such costs, and the strong buyback program should help overcome these cost pressures. With any actual revenue growth in the next few years, Best Buy will become an absurdly cheap stock as the PE ratio will dip below 10x.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BBY either through stock ownership, options, or other derivatives. 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.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.