Best Buy is an above average company at an above average valuation. This is due to the ability of the company to meet consumer needs, their efficient operations and responsible management. Although Best Buy does operate in very competitive industry, they have still developed strategies to drive growth following the current economic downturn. Taken together, I would rate Best Buy above average for quality (3.5/5 stars) and for valuation (3.5/5 stars).
- Responsible management that maintains low debt, returns money to shareholders and focuses on company efficiency
- Long history of meeting consumer needs that has allowed Best Buy to maintain market share against mega competitors like Walmart and Amazon
- New strategies in health, Totaltech memberships and online sales to help drive meaningful earnings growth
- Operates in a highly competitive low margin industry and is very dependent on a handful of critical suppliers
- Faces near term challenges following the prior surge in pandemic related sales and the current economic slowdown
Business History and Overview:
Best Buy (NYSE: BBY) is a North American consumer electronics retailer founded 1966. They were originally a music store, though Best Buy has reinvented themselves multiple times. Now they are currently the largest specialty electronic retailer following numerous bankruptcies in the industry.
Best Buy launched their Renew Blue strategy in 2012 following challenges with declining margins and revenue. Accordingly, Best Buy shut down a number of international locations and now primarily operates in the United States and Canada. Best Buy currently focuses on sales from stores, online and even at home via their new Totaltech membership support.
They currently have six revenue categories listed below.
1) Computing and Mobile Phones: This category includes computing (desktops, notebooks and peripherals), mobile phones, tablets, networking and wearables.
2) Consumer Electronics: Includes health and fitness products, home theater, digital imaging, portable audio and smart home;
3) Appliances: Includes both large and small appliances.
4) Entertainment: Includes gaming (including hardware, peripherals and software), movies, music, drones, toys, virtual reality and other software;
5) Services: Involves delivery, consultation, design, installation health-related services, memberships, repair, set-up and technical/warranty-related support.
6) Other – Includes other products baby, food and beverage, luggage, outdoor living and sporting goods.
Business Quality:
One of the strengths of Best Buy is steady sales growth of their core products over the last few years:
Computing and mobile phones makes up the majority of Best Buy sales, followed closely by consumer electronics (data for 2022 is annualized). While both categories have experienced low to moderate growth in sales, the sales of appliances has seen the fastest growth. Appliances sales have nearly doubled over the last six years. Entertainment and services have been relatively stable since 2016.
In store sales makes up Best Buy’s most profitable segment, though online sales has seen a strong increase starting in 2020:
Both 2020 and 2021 marked record profits for Best Buy, with online sales doubling since 2019. Best Buy believes that consumers will continue to prefer a more digital experience following the pandemic. Thus, they have focused on improving their online ordering to become a “leader in fast and convenient product fulfillment”. Most products are shipped directly from the manufacturer to their distribution centers, with increasing single day deliveries. Additionally, customers have the choice to receive good directly at their house or to have pickup at a local store for more expensive/bulky items.
Best Buy has also been restructuring their store locations, with focus on closing larger stores and opening smaller storefronts:
As part of the Renew Blue strategy, Best Buy has closed about 35% of their stores. Additionally, Best Buy has essentially pulled their operations out of Europe, Asia and Central America. This has allowed to company to focus on more profitable store locations and products. As of 2021, Best Buy boasted very high return of assets and return on investment due to these efficiency initiatives.
Other strategies to help drive future profits include acquisitions into healthcare technologies and Yardbird Furniture. The company is also focusing on growing their Totaltech membership to provide synergy with the Best Buy experience and supports price matching to remain competitive. Best Buy also supports climate initiatives, BIPOC and youth programs.
In terms of quality, I would rate the company as above average (3.5 out of 5 stars). I believe that Best Buy is a resilient and versatile company in a very competitive industry. Best Buy has a history of reinventing itself, which has allowed it to thrive when many competitors went bankrupt. This is reflected by Best Buy’s growing profitability and incredible return on investment over the last 5+ years. Furthermore, I believe that Best Buy has been very fiscally responsible, keeping debt low and returning capital to shareholders.
Additionally, Best Buy has been able to maintain a top three position with competitors like Walmart and Amazon. Best Buy was also able to successfully grow their online sales and expanded their market share of TV and computers since 2007. Some statistics also suggest that Best Buy consumers may be loyal, with over 10% of customers returning to Best Buy within three days in 2021.
However, the consumer electronics industry is a very difficult industry. Best Buy’s top five suppliers (Apple, Samsung, HP, LG an Sony) make up about 56% of Best Buy’s total sales. These suppliers have no written long term contract with Best Buy and changes in the relationship with these suppliers can be severely detrimental. Additionally, Best Buy is heavily dependent on fourth quarter sales (i.e. holiday spending). Promotions, advertisements and competition for consumer spending can significantly reduce profitability. This is reflected by low operating margins (4% – 6%) compared to some of the other companies covered in this site.
Valuation:
Best Buy has had strong earnings growth from 2014 to 2021, with this current year showing a decline (forward EPS reported for 2022):
A large part of this recent drop is due to economic slowdown and softening following a surge in pandemic buying. However, Best Buy does have strategies to grow their profitability. Below I list some of their strategies to drive future growth:
1) Best Buy is planning to grow their health division with a compound annual growth rate of 35 – 45%. If Best Buy can grow their health division by 35% per year, then the revenue would be about 3.2 billion by 2027 (7.5% of 2022 revenue). Best Buy also anticipates serving a growing mix of consumers, physicians, health systems, insurers and pharmaceuticals.
2) Best Buy is also planning on doubling their Totaltech membership by 2024. Assuming that trend holds and the price of membership stays at $200, then the total revenue would be $2.76 billion in 2027 (6.2% of 2022 revenue).
3) Best Buy focuses on building their brand via promotions and advertisements. Additionally, the company has implemented cost reductions and efficiency improvements to improve profitability.
4) The consumer electronics market is expected to have about 3.7% compounded annual growth over the next decade. This is comparable to the 1 – 3% compounded annual growth rate in revenue that Best Buy anticipated at the start of 2022.
In addition to the above strategies, Best Buy is also expanding into new markets:
1) Fitness and wellness ($34 billion market)
2) Personal electric transportation ($3 billion market)
3) Outdoor living: ($30 billion market)
Let’s assume that 2023 still has similar inflation/economic pressures as 2022 and that Best Buy has no growth in earnings next year. Additionally, let’s also assume that their is no share repurchases in 2023 (despite Best Buy approving $1 billion in share repurchases this year).
Starting in 2024, I am going to assume that Best Buy will have at least 2.5% growth in earnings from their multiple growth strategies above. I will also assume that Best Buy will have $1 billion in share repurchases on average starting in 2024. Additionally, I believe that Best Buy will have very little dividend growth over the next few years based on their target <45% payout ratio.
Based on these assumptions, I think a conservative estimate is that earnings will grow by about 8% (5.5% from share repurchases and 2.5% from business expansion). This could have the potential to lead to nice returns:
| Year | Predicted Dividend ($) | Predicted EPS ($) | Predicted Fair Price |
| 2023 | $3.56 | $6.62 | $87.20 |
| 2024 | $3.60 | $7.61 | $95.12 |
| 2025 | $3.64 | $8.24 | $102.99 |
| 2026 | $3.72 | $8.96 | $112.00 |
| 2027 | $3.90 | $9.79 | $122.42 |
If these assumptions are correct, then at the current share price Best Buy could have the potential to deliver a little over 10% compounded return over the next five years. This is just a bit above the average S&P 500 annual return. Thus, my opinion is that Best Buy should receive a 3.5 out 5 stars for valuation.
Risks:
Investing in Best Buy does come with a number of potential risks. As mentioned earlier, many retailers including Best Buy are seasonal and depend heavily on sales on the 4th quarter. Retailers invest significant amount of money via advertisements, inventories and personnel in anticipation for the the holiday sales. Consequently, poor Black Friday/holiday sales can be very detrimental to retailers including Best Buy.
Another risk to Best Buy is how dependent they are on their top suppliers. As mentioned earlier, the top five suppliers make up 56% of Best Buy’s sales. Many of these suppliers are also selling their product directly to consumers or indirectly via Amazon. Best Buy’s business would be severely disrupted if key suppliers choose to bypass Best Buy altogether. Many of these suppliers are also facing supply shortages which could effect Best Buy’s costs, inventory and customer experience.
Consumer spending on technology is normally stable during the last few economic downturns. However, consumer spending surged during 2020 – 2021 following work from home and stay at home guidelines. I believe that 2022 and 2023 will likely have a lull in technology sales following the 2020-2021 spike in demand and the current economic slowdown.
Final Thoughts:
In my opinion, I believe Best Buy has done excellent job navigating a challenging macro-environment. Not only has Best Buy been able to reinvent themselves to thrive in a difficult industry, but they have also been able to maintain market share against mega competitors like Walmart and Amazon. Best Buy has been focusing on meeting consumer needs, with fast delivery, pickup options and tech support helping expand their online sales.
Additionally, the new strategic initiatives have also helped make Best Buy a more agile and profitable company. Best Buy boasts remarkable returns (including return on investment), which reflects their efficiency. I also believe that company has also been responsible with debt and prioritizes returning money to shareholders
However, the competitive industry keeps Best Buy’s operating margins low and good relations with key suppliers will be critical for the company. Best Buy will likely need to remain vigilant to changes in consumer habits. Finally, retailers including Best Buy are generally very dependent on holiday sales.
Based on this analysis, I believe that Best Buy is an above average company (quality rating: 3.5 out of 5 stars) at an above average valuation (rating: 3.5 out of 5 stars). From my perspective, I believe that Best Buy could have important role in the retailer segment of my portfolio. I will personally consider Best Buy a strong buy under $70 and a good buy under $78.20.
Disclaimer:
All data reported here has been converted to from fiscal year to standard full calendar year.
I currently own stocks mentioned in this article including Best Buy stock at the time of writing this post. Additionally, I am not a financial advisor and I am not providing financial advice. I am sharing my thoughts and processes of selecting stocks for my personal portfolio for fun and entertainment purposes only.
All information provided here is on a “best of my knowledge” basis and may be incorrect. All estimates and models are guesses and may not be accurate. Stocks mentioned here may have additional risks not covered in the post.
Investing in the stock market comes with serious risk of losing money, please consult a professional financial advisor and do due diligence before investing.
