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Investment Overview for Best Buy (NYSE:BBY)
Below are key drivers of Best Buy's value that present opportunities for upside or downside to the current Trefis price estimate for Best Buy.
Stores in U.S.
Revenue Per Square Foot: Revenue per Square Foot for Best Buy US declined from $867 in 2010 to $781 in 2012, driven by comparable store sales declines and lower-than-average performance of new stores. The figure increased to $859 in 2013. Going forward, we expect the figure to decline due to increasing competition. However, there could be an upside of about 10% to our price estimate if this figure increases to $900.
- Number of Stores: We estimate the number of Best Buy big-box stores in the U.S. to decline in the future. This figure is expected to decrease from 1,055 in 2013 to about 875 by the end of our forecast period. However, there could be an upside of about 20% if the store count reaches around 1,100 by the end of our forecast period. Best Buy closed 47 U.S. Best Buy big box stores in fiscal 2013 and 1 in fiscal 2014. In case, Best Buy decides to continue with store closures and this figure reaches 800 by the end of the forecast period, there could be a marginal downside to our price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Best Buy at the top of the page.
Best Buy is the largest specialty retailer of consumer electronics in the US, selling a variety of brands of electronic devices such as TVs, home theater systems, cameras, appliances, computers, mobile phones, video games, software, and repair & installation services to consumers across the country under different store brands. It operates a click and mortar strategy, wherein it uses online channels as an effective way to boost store sales and allocates any sales made online, to its stores. Best Buy competes primarily with retailers such as Walmart, Amazon, Target and Costco.
Best Buy US is the largest source of value for Best Buy for the following reasons:
Larger number of Best Buy US stores compared to international stores
Best Buy has 1,055 stores currently in the US, whereas the number of international Best Buy stores is around 473.
Average size & number of US and international stores more than mobile phone stores
Best Buy has 406 standalone Best Buy mobile stores in the US, that focus on mobile phones and accessories. Best Buy also operates its mobile stores in the large-format Best Buy stores. On an average, Best Buy's mobile phone stores within the US or internationally are less than 2,000 square feet in size. In comparison, Best Buy US stores tend to be 30,000 to 40,000 square feet in size. Due to the large differences in store size, Best Buy stores generated significantly more in sales compared to a mobile phone store.
Focusing on growing online sales
Best Buy is also working hard to remain competitive in the online market. Technological revolution and increasing online penetration has revolutionized the consumer retail industry. Best Buy has been working toward growing its share of the e-commerce market.
The firm has also hired Stephen Gillett, a former Starbucks' CIO, who played an instrumental role in revamping Starbucks online operations. He is in charge of Best Buy's digital business, including its online stores. We believe this move is inspired by Best Buy's plan to increase its share in the growing e-commerce market.
As a percentage of total domestic revenue, Best Buy's online revenue increased 190 basis points in Q1 2015, to 8.2%, versus 6.3% last year.
Focus on technological innovation to stay competitive
In November 2011, Best Buy acquired mindSHIFT, a Massachusetts-based cloud service provider, to get access to the $40 billion managed service provider (MSP) market for small and midsize companies. In June 2012, it acquired White Glove Technologies, a Texas-based managed IT services provider (MSP), in an effort to strengthen its presence in the cloud services industry and expand its managed IT services in Texas.
Best Buy has also launched a third-party market place to offer online products from other sellers in exchange for a cut from the proceeds. Third-party sellers including Buy.com, Mambate, SF Planet, ANT Online, BeachAudio.com and Wayfair have signed up for the platform.
Shifting competition from specialty retailer to big margin players like Wal-Mart
Circuit City was the only significant direct competitor to Best Buy. However, due to its bankruptcy, it left an approximately $11 billion market for other players to exploit. This has stimulated competition among big retail chains including Walmart, Costco, and Amazon who are trying to tap this remaining market.
Competitors weighing heavy on Best Buy
Wal-Mart and Amazon are now posing stiff competition to Best Buy. Their deep discounting strategies and attractive shipping offers, combined with Best Buy's missteps with inventory in the last holiday season in the U.S., have resulted in Best Buy losing some of its market share.
Convergence of phones with other consumer electronics to drive sales
Best Buy Mobile is a concept that goes beyond selling just mobiles. As technology convergence continues and connectivity improves, electronic goods that cater to connecting consumers are expected to drive sales. The company maintains that if a device has the potential to connect consumers, then it will have that device in its stores.
Growth in mobile computing challenges Best Buy's advantage
Mobile computing has grown rapidly in recent times driven by smartphone & tablet adoption. This has stimulated usage of the internet further and consumers can now research products they want to buy from anywhere. This empowerment is challenging the unique advantage that Best Buy had enjoyed till now, which is its trained staff that educates consumers about new products to make a better purchase decision. This trend has affected Best Buy's sales as consumers can potentially research products on the internet and buy them at a cheaper outlet of their choice.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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