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
, which is about 8% above market price.
We estimate that 70% of the company's value comes from its Best
Buy stores in the U.S. The company recently reported its December
sales, which despite being in line with expectations, were
nevertheless disappointing. The U.S. business has been affected
more as domestic (U.S.) monthly revenues declined by 3.2%
year-over-year (YOY) in December vs. a 4.5% increase for the
international segment. Monthly domestic comparable store sales were
down 5% YOY vs. roughly flat for international operations. This
result was expected as the company has suffered market share
declines and pressure from an unfavorable inventory mix during the
holiday season, as we've previously discussed (
Best Buy Inventory Levels Could Prompt Discounting,
Putting Pressure on Profit Margins
While holiday shopping and inventory mix could challenge Best
Buy over the short-term, the company could also be experiencing
early signs of more long-term concerns.
Does the Proliferation of Smartphones Create Long-Term
Challenges for Best Buy
Best Buy specializes in electronics, unlike Wal-Mart which sells
almost all kinds of goods. Its differentiating factor is its
support 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, systematic
shifts in consumer purchase patterns could erode this
With the surging proliferation of smartphones and devices that
allow users to quickly search product ratings and rankings from any
location, customers now have a sea of resources at their disposal.
The development reduces customer dependence on expert salespeople
to navigate a variety of television, tablet, and smartphone
options. Any customer interested in a product can now pull out
their smartphone and instantly compare prices and functionality
without waiting for help from the store's sales staff. As
smartphones continue to penetrate the mobile market, Best Buy's
edge could come under pressure.
But Best Buy's advantage goes beyond product expertise. The
retailer also tends to be the first destination of product
releases, attracting early adopters with its initial exclusivity.
However retailers like Wal-Mart are making efforts to close this
gap as well. There was a time when Apple's (AAPL) iPhone was only
available at specialty retailers like Best Buy (apart from AT&T
and Apple stores). However, the newest model (iPhone 4) is now
available at both Wal-Mart and Best Buy stores.
These trends could give Best Buy fits beyond the recent holiday
season struggles, and hinder growth in recorded revenue per square
foot. The chart above highlights how changes to this metric could
affect the company's stock value.
While we remain bullish on valuation for Best Buy stock, we note
that accelerating shifts in consumer purchase habits, along with
increasing pressure from competitors, could produce downside to our
You can see
the complete $38.48 Trefis price estimate for Best
Buy's stock here.