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 11% above the current market price.
According to a
on DailyFinance, the retail sales and retail property prices in the
U.S. seem to be diverging as evident from the calculated index for
property prices vs. adjusted retail & food services sales (in $
billion). The index used for retail property prices is Moody's/REAL
National Retail Property Price Index. The chart below is taken from
the same article and shows this unusual divergence.
What does this indicate? Prices are a function of supply and
demand and when either supply becomes surplus or the demand goes
down, prices tend to dip. So one could conclude that despite
improvements in retail sales, the demand for retail property space
has not picked up. The big retail chains and local stores occupy
the retail space, and thus either low demand or excess supply could
point to a difficult environment for Best Buy.
Shift to Online Retailing - Best Buy Loses Edge
Clearly online retailing requires a lot less retail property
space compared to traditional brick-and-mortar format employed by
big retail chains like Wal-Mart, Best Buy, Target and Costco. We
agree that the rise in retail sales despite dip in retail property
prices could indicate that more sales are shifting online now,
which is a clear trend.
However the article also states that:
We believe that this conclusion holds special significance for
Best Buy. Although we acknowledge that the company has been pushing
significantly into online sales itself and its online sales are
growing at a much faster pace than its overall sales, a shift to
online shopping is likely to detract from a distinguishing feature
of Best Buy in customer service.
We wrote an article discussing this aspect (see article Is Best
Buy Losing its Edge?). Best Buy's differentiating factor is its
customer service and product expertise from salespeople. Customers
often choose Best Buy over discount retailers with the expectation
of receiving help in making more informed decisions regarding
products featuring cutting-edge technology. However a greater shift
to online retailing could pose danger to Best Buy's differentiating
Multi-Purpose Retailers - Best Buy competes more
While not specific just to Best Buy, one of the possibilities
mentioned in the article could be retailers trying to sell
everything - or "channel blurring."
Some of the examples are that Wal-Mart is pushing more into
electronics, and chains like CVS and Walgreens are stocking more
groceries. Retailers are trying to optimize current space to let
consumers buy more (both in type and amount) goods from their
stores and increase traffic. For example a consumer who might buy
groceries at Wal-Mart and electronics at Best Buy may be tempted to
buy both at Wal-Mart.
What does this behavior imply?
More utilization of current space thereby reducing the need of
additional retail spaces. If Wal-Mart makes its consumer
electronics offering attractive, it could prove as a disincentive
for retailers like Best Buy to open a store in same region. We do
not have evidence as to whether this has impacted demand for retail
space materially in the past, but it is something not to be ignored
and could be an important issue to tackle for retailers in the
At the end of it, the risks to Best Buy boil down in terms of
risks to its store expansion as well as revenue per square foot.
You can see how these drivers impact its price estimate by
scrolling through the slideshow above.
You can see
the complete $38.48 Trefis price estimate for Best
Buy's stock here.