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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.
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Revenue Per Square Foot: Revenue per Square Foot for Best Buy US has witnessed a decline from $953 in 2006 to $888 in 2010, partially driven by comparable store sales declines and lower-than-average performance of new stores opened. In 2011, it witnessed a decline and reached $860. Going forward, we expect it to witness a decline due to increasing competition. However, there could be an upside of about 12% to our price estimate if this figure rebounds to 2006 levels of close to $950. On the contrary, there could be a downside of about 8% if this figure declines to $750 by the end of our forecast period.
- Number of Stores: We estimate the number of Best Buy big-box stores in the U.S. to witness a decline in the coming years. This figure is expected to decrease from 1,103 in 2011 to about 863 by the end of our forecast period. However, there could be an upside of about 20% if growth in this figure picks up and reaches around 1,100 by the end of our forecast period. In fiscal 2013, Best Buy plans to close 50 U.S. Best Buy big box stores in fiscal 2013. 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 5% 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.
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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. The company operated around 1100 stores in the country. 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. Circuit City, the only direct competitor of Best Buy and the second largest electronics retailer in the US, has filed for bankruptcy. Best Buy now competes with primarily with retailers such as Walmart, Amazon, Target and Costco.
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Best Buy US is the primary source of value for Best Buy for the following reasons:
Larger number of Best Buy US stores compared to international stores
Best Buy has around 1,100 stores currently in the US, whereas the number of international Best Buy stores is around 468. Best Buy had previously acquired Carphone Warehouse and The Phone House, two European small-format retail store chains focusing on mobile phones and accessories. With these acquisitions, Best Buy now operates about 2,393 mobile phone stores in Europe. Due to their smaller size, these mobile phone stores do not generate as much in sales as a typical large-format Best Buy store would.
Average size & number of US and international stores more than mobile phone stores
In addition to about 2,393 mobile phone stores that Best Buy operates in Europe (through Carphone Warehouse and The Phone House), the company has about 305 standalone Best Buy mobile stores in the US that also 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 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.
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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. As part of this effort, it is rebuilding its internal IT team over the course of next 12 months and plans to hire approximately 200 IT professionals.
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.
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. This acquisition is expected to have synergies with the Best Buy Geek Squad. 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 adoption and now tablets are making their way as well. 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.
Trefis Forecast Rationale for Best Buy US Gross Profit Margin
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This represents the gross margins associated with Best Buy US stores.
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Gross profit margins for Best Buy US have remained stable and range bound historically. The figure was about 24.6% for 2008, an increase of 0.1% over 2007, primarily due to improved margin rates in the TV business and an increase in sales of higher margin phones. This was partially offset by increased sales of lower margin notebook computers. Margins increased further to 25.1% in 2010 following a slight dip in 2009.
In 2011, margins declined to 24.4% owing to increasing promotional expenses and competition.
We expect the profit margin to witness a decline in coming years and later stabilize around 23%.
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Trefis considered the following factors for its forecast
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- Best Buy Mobile expansion will aid margins
- The retailer has stated that its Best Buy mobile stores are helping in margin improvements.
- As the company continues its expansion in mobile and connected devices segment, margins are likely to improve going ahead.
- Newer technologies like 3D TVs will help Best Buy's margins
- 3D TVs present opportunity of higher margins for Best Buy, but their adoption rate has been slow thus far.
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- Competitors like Walmart have indicated their plans to cut prices, thereby leading to a reduction in gross margins. Best Buy, though caters to the premium segment, will have to be competitive in prices in order to compete.
- If TV prices continue to fall, the pressure on margins will be higher
- TV sales comprise of a major chunk of Best Buy's annual revenues. The average selling prices of TVs has been declining for the past few years and if it continues to fall, Best Buy may not be able to maintain its margins on TV sales. This will in turn affect the overall margins.
- In the future as more 3D programming is available, their sales may pick up and Best Buy may benefit in terms of margins, but the impact is likely to be limited.
Back to Company OverviewHow 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 MethodologyView All Help Topics