- Domestic Segment constitutes 83% of the Trefis price estimate for Best Buy's stock.
WHAT HAS CHANGED?
- Best Buy Smashes Q1 Estimates
Best Buy's adjusted EPS of $2.23 delivered an approximate 60% surprise above analyst average forecasts of $1.39, while revenue of $11.64 billion topped the consensus by 11%. But a truly scorching growth came in Best Buy's comparable sales metrics - which jumped 37.2% rather than growing 17.1% for the quarter as the market expected. The company said it had sales growth across almost all categories, with the largest gains in home theater, computing, and appliances.
The strong housing market has inspired consumers to invest in technology and appliances. The retailer raised its forecast for the year after seeing demand continue into the second quarter.
- Revised Forecast
Best Buy expects same-store sales to grow 3% to 6% this year. It had previously stated that they would range from a decline of 2% to a growth of 1%. However, the company also anticipates customers to step up spending in other areas, such as travel and dining out, in the second half of the year.
- Geek Squad Is A Strong Selling Point
Best Buy bought Geek Squad 18 years ago to provide a technical assistance service, with an in-store, online, and 24-hour telephone and emergency online support for its customers. Moreover, customers can avail themselves of a wide range of services including smart home installation, appliance repairs, and wearable technology support. Best Buy also allows customers to come into stores to try out products before buying them. Over the years, the company has expanded its services to enable customers to use Geek Squad services for some products purchased at places other than Best Buy.
Although the company does not report the exact revenue from Geek Squad, a report suggests that roughly 3% of the company’s net sales were attributable to Geek Squad. This translates to more than $1 billion of sales for the company through this channel. In addition, the presence of consulting and installation services for devices that are difficult to configure or physically install also presumably drives traffic to Best Buy stores.
- Closure of Best Buy U.S. Mobile Stores
In fiscal 2019, the company closed its 257 remaining Best Buy Mobile stand-alone stores in the U.S. The stores reportedly contributed only a little over 1 percent to the company’s overall revenue. The company still continues to sell mobile phones both online and in its big-box stores. The margins at these stores compressed and the cost of operations in mobile standalone stores was higher than its big box stores.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
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 the U.S.
Revenue Per Square Foot: Revenue per Square Foot for Best Buy U.S. grew from $990 in fiscal 2019 to $1124 in fiscal 2021, driven by the growth in enterprise comparable sales and better-than-expected performance of new stores. Going forward, we expect the figure to gradually increase as the company continues the expansion of its store-within-a-store format. There could be an upside of up to 5% to our price estimate if Best Buy manages to thwart competition and significantly improve this figure to $1293 by the end of the forecast period.
- 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 991 in FY 2021 to about 956 by the end of our forecast period. In case, Best Buy decides to accelerate store closures and this figure reaches 890 by the end of the forecast period, there could be a downside of about 5% 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 U.S., 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 is executing on its strategy to cut costs, optimize square footage, grow online sales, and stabilize its revenue stream. The retailer returned to real growth in 2017 (fiscal 2018), with revenue growth of 7% year-over-year (y-o-y) to around $42 billion. This growth followed largely flattish revenue growth in previous fiscal years. In addition, the company's revenue also grew 2% y-o-y to around $43.6 billion in fiscal 2020, largely due to an enterprise comparable sales increase of 4.8%. In fiscal 2021, the company saw an 8% growth y-o-y as it benefited from people transitioning to working from home earlier during the pandemic with the growth in sales of products such as batteries, PCs, laptops, LCDs, printers, and Refrigerators.
SOURCES OF VALUE
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 had 991 stores (as of February 2021) in the U.S., whereas the number of international Best Buy stores stood around 168.
Focusing on growing online sales
Best Buy is also working hard to remain competitive in the online market. Technological revolution and increasing online penetration have revolutionized the consumer retail industry. Best Buy has been working toward growing its share of the 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. 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. In 2017, Best Buy acquired GreatCall, a provider of connected health and personal emergency response services primarily to seniors, for $800 million in cash. The service already has more than 900,000 paying subscribers. According to Best Buy, this acquisition is in line with the Best Buy 2020 strategy to improve lives through technology and address human needs.
Best Buy has also launched a third-party marketplace 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.
Upcoming boom in ultra-high definition TV market
Ultra HD, also colloquially called “4K,” is the latest technology in televisions. These have 4 times the resolution of a standard 1080p television and the television industry expects this next-gen technology will inject some profits back into a stagnated industry. The global market for big-screen televisions is rebounding as consumers replace their flat-screen devices that hit the market a decade ago, according to the Consumer Electronics Association. The global 4K TV market is expected to reach USD 381 million by 2025.
Shifting competition from a 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.
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.