Best Buy Co possess sound long-term strategy in spite of the fact that the future of retail is in flux

quick fulfillment across channels, and tech solutions to more problems than ever before. As a result, Best Buy’s “Building the New Blue” strategy continues to resonate, with the firm leveraging its physical footprint for fulfillment and post-sale services, emphasizing its differentiated service offering, and experimenting with newer store formats, as the “one size fits all” retail model across trade areas appears antiquated.

With more than 40% of sales coming through digital channels in calendar 2020, the firm’s recent supply chain and e-commerce investments look prescient. Next-day delivery now covers 99% of U.S. zip codes, allowing the firm to compete on more level ground against e-commerce competitors, like wide-moat Amazon-as buy-online-pick-up-in-store (BOPIS) volumes, at 40% of e-commerce sales, remain challenging for online-only stores to replicate.

Best Buy Health remains intriguing, with lower price elasticity and auspicious tailwinds from an insurer pay model. However, competition in the space remains rife, as a number of moaty firms with extensive healthcare aspirations (Google, Microsoft, Amazon, Apple, Facebook) have invested heavily in the segment, as well.

Financial Strength:

The fair value of Best Buy has been increased by the analysts from $101 to $116 reflecting a longer horizon for excess returns, the time value of money, and the impact of high-single-digit anticipated comparable store sales growth through 2021. It also implies forward price/earnings of 12.1 times and an EV/2022 EBITDA of 5.4 times.

Best Buy’s financial strength is sound, with the firm maintaining a net cash position at the end of the second quarter of fiscal 2022 and an investment-grade credit rating. With leverage well under 1 turn (0.4 debt/EBITDA at fiscal 2021 year-end), strong interest coverage (46 times at year-end 2021), and no meaningful maturities until 2028, very little financial risk is seen for the firm in the near to medium term. Access to a $1.25 billion credit facility adds a further degree of insulation.

Best Buy pays an attractive dividend, with a 2.6% yield at current market prices, and we anticipate 12.8% average growth over the next five years as the firm returns to its historical dividend payout ratio target (35%-45% of earnings).

Bulls Say:

With digital sales volumes projected to remain roughly double pre-COVID-19 levels, Best Buy should better compete for online volumes that it historically ceded to online-only competitors.
Improving route densities should improve the margin profile of small parcel e-commerce sales, with 35% of store “hubs” now handling 70% of ship-from-store volume.
The Best Buy Beta program should increase touchpoints with the firm’s best customers, increasing spending relative to pre-program behavior.

Company Profile:

With $47 billion in 2020 sales, Best Buy is the largest pure-play consumer electronics retailer in the U.S., with roughly 10% share of the aggregate market and nearly 40% share of offline sales, per our calculations, CTA industry, and Euromonitor data. The firm generates the bulk of its sales in-store, with mobile phones and tablets, computers, and appliances representing its three largest categories. Recent investments in e-commerce fulfillment, accelerated by the COVID-19 pandemic, have seen the U.S. e-commerce channel roughly double from prepandemic levels, with management estimating that it will represent a mid-30% mix of sales moving forward.

(Source: Morningstar)

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