Can Best Buy Survive The Amazon Threat?

by Trefis Team
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Best Buy’s stock (NYSE: BBY) has grown by a strong 113% (as of September 10) since the coronavirus low on March 23, pushing its market value close to $28 billion. Over the same time, Amazon’s stock (NASDAQ: AMZN) has gained about 70% of its value and has literally dwarfed all of its retail competitors, with a valuation of nearly $1.6 trillion. Best Buy has a significant share in the U.S. consumer electronics retail segment, with a market share of about 15%. However, the company has lost share in recent years to online retailers – particularly Amazon, forcing it to enter pricing wars and invest in enhancing online offerings to better integrate their digital and brick-and-mortar businesses. Consequently, Best Buy (generating more than 25% of sales online) was able to drive consumers to purchase electronics online without losing customers to the e-commerce giant in the recently reported FY Q2. It saw a major sales boost from the work from home and virtual school trends and is poised to survive the Amazon dominated market in the long-term.

We discuss more in our detailed dashboard analysis, ‘Best Buy Looks Cheap vs Amazon wherein we compare trends in key metrics for the two retailers over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

Best Buy vs. Amazon

Both companies will likely outperform the broader market over the long run. However, it is unfair to compare Best Buy’s financials with Amazon, given the scale mismatch. Still, if we compare the fundamentals, Best Buy’s 2015-19 annualized revenue growth of 2.5% is much lower than that of Amazon’s growth rate of 27%. Also, Best Buy’s annualized EPS growth during the same period of 26% is strikingly down from Amazon’s 107%. In addition, Best Buy’s P/E based on fiscal 2020 (year ended Jan 2020) earnings have grown from over 16x to 20x currently, while Amazon’s multiple is expensive compared to Best Buy and has grown steeply from 79x to about 135x. The growth in multiples can be attributed to the sudden increased demand in home improvement and electronics segments due to the extra time at home caused by the pandemic. 

Needless to say, Amazon is a better buy among the two companies. But, we cannot underestimate the growth potential of Best Buy. The brick-and-mortar retailer uses its Geek Squad services as a strong selling point, wherein it offers services and convenience that its online competition does not. The company closely worked with vendors and trained employees to draw shoppers back to stores again in Q2 using these services. Early in the coronavirus crisis as well, the retailer altered its business to contactless, curbside-only pickup, and delivery, in the wake of store closings. Consequently, sales in the final six weeks of FY Q1 were 81% those of the same period of 2019. While other retailers saw their top lines decline at much steeper rates.

BBY Is Thriving On The Covid Wave 

In fiscal Q2 (ended August 1), Best Buy’s total revenue grew 4% year-over-year (y-o-y) to $9.9 billion on a 5.8% increase in comparable sales, even with lower advertising spending and a much smaller workforce. Notably, domestic online sales grew by a large 242%, growing to 53% of the domestic sales mix from 16% a year ago. This made Q2 the busiest quarter for online sales in Best Buy’s history by a wide margin. Customers chose to pick up 41% of those online orders in stores or curbside. The retailer’s total operating expenses declined by about $200 million y-o-y, as its stores reopened after functioning as an appointment-only store for the first six weeks of the quarter. This enabled Best Buy to grow its adjusted operating margin by 190 basis points y-o-y to 5.9%, driving a 58% surge in adjusted earnings per share to $1.71.

From a merchandise perspective, Best Buy saw strong sales of computing equipment, tablets, and appliances, partially offset by flat sales in gaming consoles and declines in smartphone deals. However, these weaker categories are expected to rebound big time moving into next year. Best Buy stands to benefit from Apple’s launch of 5G iPhones. In addition, Microsoft and Sony are also expected to launch their next-generation gaming consoles by the end of this year.

Overall, we believe Best Buy can stay relevant in an Amazon- dominated market, and the brick-and-mortar retailer’s stock price at levels of around $107 provides a buying opportunity for investors willing to be patient.

What if you’re looking for a more balanced portfolio instead? Here’s a top-quality portfolio to outperform the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.

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