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 price estimate for Best Buy stands at $38.48
, which is about 20% above market price.
The company's stock has struggled to gain ground since Best
Buy's earnings release in December 2010. Best Buy has faced limited
demand for featured products like 3D TVs, and appears to have
underestimated competition from players like Wal-Mart and Amazon
(AMZN). Beyond these challenges, we've also explored the developing
trend of increased mobile internet usage, and the potential threat
this poses to Best Buy's key advantages (see our article
Is Best Buy Losing its Edge?
Despite these obstacles, we believe Best Buy can benefit from
better management of its inventory in 2011 and can also take steps
to mitigate the growth headwind created by competitors. What
else is Best Buy doing?
Best Buy's recent announcements indicate that the company is
focusing efforts on more profitable stores, and closing those that
are less profitable. The company is also looking to restructure its
global operations to yield cost benefits.
Best Buy's Steps and Cost Benefits
Best Buy recently announced its plans regarding store expansion,
with emphasis placed on growth areas like Best Buy Mobile stores in
the U.S. and Five Star stores in China.
The Best Buy brand has struggled to gain traction in China and
the company has decided to shift direction and close all its Best
Buy brand stores in the region, as well as those in Turkey.
Instead, it will push forward on operations of its Five Star
stores, a local Chinese brand that Best Buy acquired some years
The restructuring effort is expected to result in annual cost
savings of about $60-70 million beginning in 2013. However, the
initiative will cost the company roughly $245 million over next
couple of years.
How might this affect Best Buy's stock value?
Slight Margin Improvements Could Add Some Value, But Not
If we assume that costs and savings from the restructuring are
incremental to our base forecasts, it implies that Best Buy may
witness slightly compressed margins over the next couple of years
and improvements thereafter. How big could this be for the company?
A back of the envelope calculation suggests that the cost savings
could lift gross margins by barely 0.15%. So not a great deal of
incremental value added. This calculation also assumes that
all cost benefits are absorbed by the U.S. segment. Of course, in
reality, this will be spread across all divisions, but the
magnitude of the impact can be gauged by making this assumption to
See our full analysis and $38.48 price estimate
for Best Buy
When comparing Best Buy's revenues ($50+ billion) to expected
cost savings ($60-70 million) , one can understand why the upside
benefit to overall company value might be limited.
Drag the trend line in the interactive chart above to see the
affect of various U.S. store gross profit margin scenarios on Best
Buy's stock value.