Best Buy (
) is a specialty electronics retailer that competes with general
retailers like Wal-Mart (
) and Costco (
) as well as other specialty retailers like GameStop (
) and Radio Shack (
Our current price estimate for Best Buy's stock
stands at $38.48
which is about 10% above the market price. We estimate that Best
Buy generates about 70% of its stock value from US stores.
Best Buy's stock fell significantly after the announcement of
its Q3 2010 earnings and hasn't made much forward progress since.
The primary reason was lower then expected sales stemming from the
company's misjudgment of consumer demand and competition. We've
previously analyzed Best Buy's product missteps following the Q3
earnings release (See:
Can Best Buy Correct Product Missteps?
Beyond weak sales numbers, Best Buy's product misjudgment has
also led to a notable 8% increase in inventory levels at the end Q3
vs. last year. Although Best Buy has rejected the idea that it
will need to discount heavily to get rid of the increased
inventory, the company might find itself forced to alter its stance
in order to maintain market share.
Recent Market Share Loss
Retailers like Wal-Mart and Amazon are taking some of
Best Buy's consumer electronics market share with the help of
promotional discounts and offers along with effective online sales
strategies. Best Buy estimates that it lost approximately 1.1%
market share in the 3rd quarter.
Will the company need to resort to discounting in order to
regain market share and reduce inventory levels?
Profit Margin Impact
Best Buy has already loosened its return policy and eliminated a
15% restocking fee on electronics. It is difficult to pinpoint the
potential impact of this announcement, but it will likely lead to
increased returns, greater restocking, and consequently additional
inventory. As inventory levels become further bloated, Best Buy may
be forced to start dropping prices. Any such move would pressure
company profit margins, although we note that the long-term impact
From a long-term perspective, we remain bullish on Best Buy. We
believe that the company will able to rectify its inventory
concerns, although uncertainties surrounding pricing and product
inventory might cause investors to remain cautious, maintaining
near-term pricing pressure on the company's stock.
See our full company breakdown and estimates for key drivers
to Best Buy's stock value in the display below.
You can see
the complete 38.48 Trefis price estimate for Best
Buy's stock here.