Best Buy's Upside Hinges on Consumers Stepping Up Electronics Purchases
Best Buy ( BBY ) is a specialty electronics retailer that competes with general retailers like Wal-Mart ( WMT ) and Costco ( COST ) as well as other specialty retailers like GameStop ( GME ) and Radio Shack ( RSH ). Our price estimate for Best Buy stands at $38.48 , which is about 18% above market price.
If we look at how Best Buy's revenue per square foot figure stacks up against Wal-Mart for the U.S. market, it turns out that the electronics retailer's revenue per square foot is twice the figure of Wal-Mart's. Clearly this is due to the type of merchandise sold over anything else. While Wal-Mart sells almost every type of merchandise, Best Buy specializes in electronics and these items tend to sell at much higher prices compared to other types of merchandise.
We expect revenue per square foot to continue to grow as consumers spend more on electronics as a total portion of spending versus before. Consumers now are more likely to buy new technologies and upgrade existing ones more frequently than before. Spending is also supported by an improving economic outlook as higher employment rates and more confidence in one's future income will give consumers more flexibility to spend on discretionary items like electronics.
However, there are certain headwinds that could face Best Buy.
Electronics Sales Growth in 2011 Could Slow from 2011
According to the Consumer Electronics Association, consumer electronics growth in 2011 will be under 4% and below the 6% registered in 2010, on a year over year basis. The following chart is taken from ce.org and depicts historical data, estimates for 2010, and forecast for 2011. If we look at the 2006-08 data, growth was higher than what CEA expects growth to be between 2009 and 2011. So the CEA expects spending on electronics to grow more slowly than before which could impact Best Buy.
We have written about competitive pressures on Best Buy in the past. Wal-Mart and Amazon seem to be taking some market share from Best Buy, and the company has suffered slightly from over-emphasizing newer technologies that will still take time to pick up. What additionally might hurt Best Buy is growth in e-commerce that lets consumers research products and make informed decisions online from specialized retailers like Amazon rather than go to stores like Best Buy and get advice from sales personnel.
The company's revenue per square foot has fallen in recent years; however, we remain optimistic that this will recover in the coming years, as depicted in the chart above. However, if the factors described above weigh too much on Best Buy, its revenue per square foot growth might be stunted or could decline further. To gauge its sensitivity, if revenue per square foot stayed constant rather than rise gradually, this would take off about 5% from our price estimate.