Best Buy’s (NYSE:BBY) stock recently experienced a sharp drop, from over $40 to below $30 in the span of just a few months, as confidence among investors seems to have weakened. The company competes with general retailers like Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST) as well as other specialty retailers like GameStop (NYSE:GME) and Radio Shack (NYSE:RSH). Below we take a look at key drivers to Best Buy’s stock value and highlight where investors’ concerns might be coming from.
Our price estimate for Best Buy stands at $38.48, roughly 35% ahead of the stock’s market price.
Investors Seem to Anticipate Declining Revenue per Square Foot…
Revenue per square foot is a critical metric for retailers, shedding a light on trends in sales productivity. Given Best Buy’s focus on selling high-value products, its revenue per square foot figure is typically higher than that of discount retailers like Wal-Mart.
Over the past few years, however, Best Buy’s revenue per square foot for U.S. stores has declined. Although we currently project a rebound in this metric as the economy recovers and Best Buy resolves prior product missteps (3D TV comes to mind), investors seem a bit less optimistic. If this number continues to decline towards $800 by the end of our forecast period, it would imply roughly 10% downside to our $38.48 price estimate.
What could make this happen? Lackluster TV sales and increasing competition from Wal-Mart and Amazon. On top of this, the proliferation of smartphones, allowing customers to research products and prices online from any location, could diffuse Best Buy’s edge in customer service.
… and Stagnation of Big Box Expansion in the U.S.
In addition to this, investors also seem to anticipate a reduced expansion of Best Buy’s big box format stores in the U.S. as the company instead focuses on smaller Best Buy mobile stores. Assuming that Best Buy’s U.S. store count remains roughly stagnant (not counting mobile and other branded stores), it would imply another 5% downside to our price estimate for Best Buy stock.
