Why Best Buy Is Acquiring GreatCall For $800 Million

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Best Buy (NYSE:BBY) recently announced the acquisition of 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. This deal is expected to add to Best Buy’s growing business of selling health and wellness-related products, and is expected to close by the end of the fiscal third quarter. The company also expects the impact of the acquisition on EPS to be neutral in fiscal 2019 and fiscal 2020, and accretive by fiscal 2021. It should also be noted that the acquisition is not expected to impact Best Buy’s plan to spend $1.5 billion on share repurchases during fiscal 2019.

Going forward, we expect Best Buy’s revenue to remain largely flat through fiscal 2020. To arrive at our fiscal 2020 net revenue estimates for Best Buy, we have broken down the revenue streams and estimated separately. We have also created an interactive dashboard on how Best Buy will grow in the next two years, which provides a detailed analysis of how to arrive at our growth forecasts. You can make changes to these variables to arrive at your own revenue estimates for the company. We have a $74 price estimate for Best Buy, which is slightly below the current market price.

Progress On Best Buy 2020 Strategy

Best Buy completed its Renew Blue transformation strategy in March 2017, in a timespan of fewer than 5 years. The strategy, which was aimed at addressing the company’s falling comparable sales as well as its declining operating margin, has apparently worked out in the company’s favor. Consequently, Best Buy returned to real growth in fiscal 2018 (year ending January 2018), with revenue growth of 7% y-o-y to around $42 billion, primarily driven by an enterprise same-store sales increase of nearly 6%. This growth followed largely flattish revenue growth in previous fiscal years.

The company is now pursuing its new growth strategy, Best Buy 2020: Building the New Blue. The retailer sees a number of opportunities in the next phase of growth – including growing its smart home business and gaining mobile market share. Best Buy 2020 is aimed at helping the company find more stable revenue streams. In addition, cost-cutting continues to be a goal for the company, which could help offset inflation and fund future investments.

 

We expect Best Buy to generate around $42 billion in revenues in fiscal 2019, and earnings of almost $1 billion. Our revenue forecast of $42 billion represents a year-on-year decline of around 1%. Of the total expected revenues in fiscal 2019, we estimate $38 billion in the Best Buy U.S. business and almost $4 billion in the Best Buy International business. Best Buy closed its 250 small mobile stores across the U.S., and therefore, we have excluded these numbers from our forecast. Also, the company expects these mobile store closures to negatively impact full-year fiscal 2019 revenue by approximately $225 million, with a flat to slightly positive impact on its operating income. It should be noted that fiscal 2019 has 52 weeks as compared to 53 weeks in fiscal 2018.

We also expect Best Buy’s revenues to grow slightly y-o-y to $42.5 billion in fiscal 2020, driven by strong performance in the domestic segment. Further, we estimate Best Buy’s 2020 store count in the U.S. to be just over 990, with an average square footage per store of 39k and revenue per square foot of $1004, translating into about $39 billion (+2% y-o-y) in domestic revenues in fiscal 2020. In addition, we also expect close to 210 stores in international markets, with an average square footage per store of 21k and revenue per square foot of $796, translating into $3.6 billion (-9% y-o-y) in international revenues in the same period. On similar lines, we expect other standalone store revenues to reach $400 million (flat y-o-y) in fiscal 2020, with 28 stores, 26k square footage per store and $514 of revenue per square foot.

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