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Best Buy Co. Inc. Fundamental Analysis

Disclaimer: This article by The Globetrotting Investor is general in nature. We aim to bring you long-term focused analysis driven by fundamental data, hence, providing you commentary based on historical data and analyst forecasts only using an unbiased methodology. This is not a buy/ sell recommendation, and it is solely for educational purposes. Please do your research before investing. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Please read the full disclaimer here.

Best Buy Co. Inc

Last Updated: 24 April 2023

NYSE: BBY

GICS Sector: Consumer Cyclical

Sub-industry: Specialty Retail

https://www.bestbuy.com

Best Buy Co. Inc Fundamental Analysis | Best Buy Co. Inc Logo | Fundamental Analysis by The Globetrotting Investor

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Table of Contents

You can download a summary of Best Buy Co. Inc's fundamental analysis in PDF here.

Management

Best Buy Co. Management

CEO: Corie Barry 

Tenure: 3.8 years 

Best Buy Co., Inc's management team has an average tenure of 3.8 years. It is considered experienced.

Source of Revenue

Best Buy Co. Source of Revenue

Best Buy Co. Inc. engages in the retail of technology products in the United States and Canada. The company has two reportable segments: Domestic and International.   


The Domestic segment comprises operations in all states, districts and territories of the U.S. and Best Buy Health business, and includes the brand names Best Buy, Best Buy Ads, Best Buy Business, Best Buy Health, CST, Current Health, Geek Squad, Lively, Magnolia, Pacific Kitchen and Home, TechLiquidators and Yardbird and the domain names bestbuy.com, currenthealth.com, lively.com, techliquidators.com and yardbird.com.   


In fiscal 2022, Best Buy Co. acquired all the outstanding shares of Current Health and Yardbird.   All of Best Buy Co.’s former stores in Mexico were closed as of the end of the first quarter of fiscal 2022, and the International segment comprises all operations in Canada under the brand names Best Buy, Best Buy Mobile and Geek Squad and the domain name bestbuy.ca. 


The management of the Domestic and International segments is overseen by leadership teams who are responsible for all aspects of the business. Both segments utilise an omnichannel platform, enabling customers to interact online, visit physical stores, or have Best Buy Co. provide services in their homes.   


As of the end of the fiscal year 2023, Best Buy Co. operated a total of 1,138 stores across both segments. The stores play a crucial role in the omnichannel strategy and are seen as a significant competitive advantage. Additionally, the company have implemented vendor store-within-a-store concepts to foster closer partnerships with vendors and provide a superior customer experience.   


Customers in the Domestic and International segments also have the option to purchase products online and choose to either pick them up at a Best Buy store (including curbside pick-up for select products at most Domestic stores), at an alternative pick-up location or have them delivered directly to their homes. The ship-from-store capability enables Best Buy Co. to enhance product availability and delivery speed for customers.


Best Buy Co. Inc.

Both the Domestic and International segments have offerings in six revenue categories. The key components of each revenue category are as follows: 


Computing and Mobile Phones - computing (including desktops, notebooks and peripherals), mobile phones (including related mobile network carrier commissions), networking, tablets (including e-readers) and wearables (including smartwatches); Consumer Electronics - digital imaging, health and fitness products, home theatre, portable audio (including headphones and portable speakers) and smart home; Appliances - large appliances (including dishwashers, laundry, ovens and refrigerators) and small appliances (including blenders, coffee makers and vacuums); Entertainment - drones, gaming (including hardware, peripherals and software), movies, music, toys, virtual reality and other software; Services - consultation, delivery, design, health-related services, installation, memberships, repair, set-up, technical support and warranty-related services; and Other - other product offerings, including baby, food and beverage, luggage, outdoor living and sporting goods.   


Like many other retailers, Best Buy Co.’s business is seasonal. A large proportion of its revenue and earnings is generated in the fiscal fourth quarter, which includes the majority of the holiday shopping season.


Best Buy Co. Inc. Reportable segments include Domestic and International.

Best Buy Co. Inc Reportable Segment Revenue FY2022

Best Buy Co. Inc Revenue Categories Breakdown includes consumer electronics, appliances, entertainment, services, other, computing and mobile phones

Best Buy Co. Inc Revenue Categories Breakdown FY2022

Best Buy Co. Inc Economic Moat

Best Buy Co. Economic Moat
Best Buy Co. Inc. has no economic moat. This is based on its intangible asset, cost advantage, efficient scale, network effect and switching cost.

Best Buy Co. Inc Economic Moat

Economic Moat: None 


There are many ways to identify Best Buy Co. Inc’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Best Buy Co. Inc. Please check my summary to understand more about the economic moat.

Performance Checklist

Best Buy Co. Performance Checklist

Is Best Buy Co. Inc’s revenue growing YoY for the past 5 years consistently? Inconsistent. 

Is the net income growing YoY for the past 5 years consistently? Inconsistent. 

Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent. 

Is the free cash flow positive for the past 5 years? Yes. 

Is the gross margin % consistent/ growing for the past 5 years? Yes. 

Is the EPS growing for the past 5 years? Inconsistent.


Best Buy Co. Inc. financial performance which includes its revenue, net income, operating cash flow, and FCF over the recent 5 years.

Best Buy Co. Inc Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)


Is the free cash flow per share growing for the past 5 years? No.


Best Buy Co. Inc free cash flow per share is inconsistent for the past 5 years.

Best Buy Co. Inc FCF per Share

Management Effectiveness

Is Best Buy Co. Inc’s ROE consistently at 12%-15% YoY for the past 5 years? Yes.

Best Buy Co. Management Effectiveness
Best Buy Co. Inc ROE inconsistent.

Best Buy Co. Inc Return on Equity


Is the ROIC consistently at 12%-15% YoY for the past 5 years? Yes.


Best Buy Co. Inc ROIC is greater than its WACC.

Best Buy Co. Inc Return on Invested Capital vs Weighted Average Cost of Capital


The trendline for the number of shares outstanding is decreasing, which is something that an investor would be pleased to see.

The number of Best Buy Co. Inc shares outstanding has been decreasing over the past 5 years.

Best Buy Co. Inc Shares Outstanding (Million Shares)

Best Buy Co. Inc Financial Health

Best Buy Co. Financial Health
Best Buy Co. Inc balance sheet which includes total equity, total debt, and cash & short-term investments.

Best Buy Co. Inc Financial Health (USD Million)


Current Ratio: 0.9 (fail my requirement of >1.0) 

Debt-to-EBITA: 1.5 (pass my requirement of <3.0) 

Interest Coverage: 55.5 (pass my requirement of >3.0) 

Debt Servicing Ratio: 1.9% (pass my requirement of <30.0%)

Dividend

Current Dividend yield: 5.1% 

Have the dividend payments been stable for the past 5 years? Yes. 

Have the dividend payments been growing for the past 5 years? Yes. 


Best Buy Co. Inc’s dividend payments are reasonably covered by its earnings and its cash flows.

Best Buy Co. Dividend

Best Buy Co. Inc Stock Performance

Best Buy Co. Stock Performance

The graph below compares the cumulative total shareholder return on Best Buy Co. common stock for the last five fiscal years with the cumulative total return on the S&P 500 Index, and the Standard & Poor's Retailing Group Industry Index. 


The graph assumes an investment of $100 at the close of trading on February 2, 2018, the last trading day of fiscal 2018, in Best Buy Co. common stock, the S&P 500 and the S&P Retailing Group.


Best Buy Co. Inc stock performance against its respective benchmarks.

Best Buy Co. Inc Stock Performance

Best Buy Co. Inc Intrinsic Valuation

Estimated intrinsic value: $137.21 

Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning. 


Average free cash flow used: USD$2,000M 

Projected growth rate: 6% - 7% 

Beta: 1.52 

Discount rate: 9.6% 

Margin of safety: 45% (Uncertainty: High) 

Price range after the margin of safety: <$75.00 

Date of calculation: 22 April 2023

Best Buy Co. Intrinsic Valuation
Best Buy Co. Inc. Valuation


Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.   


Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.


Best Buy Co. Inc Intrinsic Valuation

Best Buy Co. Inc Intrinsic Valuation

Best Buy Co. Inc Relative Valuation

Best Buy Co. Relative Valuation
Best Buy Co. Inc fair value and its 52-week range.

Best Buy Co. Inc EV-to-EBITA vs its peers

Best Buy Co. Inc Price-Earnings Ratio vs its peers

Best Buy Co. Inc Price-Earnings Ratio vs its peers

Best Buy Co. Inc Historical Price-Earnings Ratio

Best Buy Co. Inc Historical Price-Earnings Ratio

Additional Resources

I recommend reading University of Berkshire Hathaway as it greatly helps in my stock analysis. If you want a complete collection of recommended books, please visit here.

My Top Concern

One key concern is that Best Buy Co. operates in a highly dynamic industry. Many of the products that the company sells are highly susceptible to technological advancement, product life cycle fluctuations and changes in consumer preferences. If Best Buy fails to adapt to these changes, it can result in consequences such as failure to meet customer demand, excess inventory, difficulty in securing popular products, and damage to its brand and reputation.   


Furthermore, the retail sector faces competitive pricing which is a significant factor for customers. Price transparency and comparability are increasing due to digital technology, and consumers can easily compare prices in real-time. As online and mobile sales are growing, with a focus on delivery services, customers expect fast and low-cost or free shipping. Best Buy’s ability to compete on delivery times and costs depends on various factors, and failure to manage them effectively could negatively impact its revenue and profitability.   


The last concern that I have is its vendor relationship. Best Buy sources products from a wide range of domestic and international vendors, with its top twenty suppliers accounting for 79% of purchases, and five suppliers (Apple, Samsung, HP, LG, and Sony) representing 57% of total merchandise purchased in the fiscal year 2023. 


The company generally does not have long-term contracts with vendors, and therefore its profitability relies on securing favourable terms with them. However, vendors may leverage their competitive advantages, such as financial strength, brand recognition, online channels, or relationships with other retailers, which could impact Best Buy’s business.

My Top Concern

Summary for Best Buy Co. Inc

Summary for Best Buy Co.

The consumer electronics market is highly competitive, with price comparisons, aggressive discounting, and short product lifecycles driving the need for constant innovation to meet evolving customer demands. 


E-commerce giants like Amazon and mass merchants like Walmart have reshaped the market, raising customer expectations for omnichannel fulfilment, fast delivery, and round-the-clock platform access. In this challenging landscape, only a few companies including Best Buy Co. have successfully differentiated themselves by leveraging intangible assets and scale-driven cost advantages.   


Best Buy has established a trusted brand that attracts customers to its stores, and its unique service model helps strengthen relationships with both vendors and customers.   


One key advantage that Best Buy has in the consumer electronics market is that it does not have a major competitor with physical stores and its services-led value approach makes it attractive for customers who need expert support or prefer showrooming. This also gives the company an edge over e-commerce operators in these situations.   


Furthermore, Best Buy's turnaround efforts have positioned it well to compete for time-sensitive purchase occasions. The company’s convenient store locations, quick pick-up options for online orders, in-store displays, service contracts, and focus on higher-priced products help address customer worries about expensive electronics being left unattended on their doorstep.   


Best Buy's strong reputation for auxiliary services, including Geek Squad support, Best Buy Totaltech service program, and in-home services, helps build strong relationships with vendors and enables Best Buy to outperform competitors for sales of "uncertain" products, where customers are unsure which specific product would best meet their needs.   


Vendors like Apple, Samsung, HP, LG, and Sony are attracted to Best Buy's commitment to providing a positive brand experience through in-store hubs, post-purchase services, and servicing products for Total Tech customers, regardless of where they were purchased.   


For smaller partners, Best Buy serves as a demand amplifier by introducing customers to new technologies and driving adoption among early adopters. Its scale allows for price competitiveness and incremental revenue for partners, while its large store footprint helps to reduce logistics costs.   


Best Buy has effectively adapted to the changing retail landscape by repurposing store space for omnichannel fulfilment and creating dedicated areas for key vendors to showcase products, provide post-purchase services, and engage with customers. While there are risks associated with vendor relationships, Best Buy's unique proposition of comprehensive in-store services creates a valuable and difficult-to-replicate advantage. These relationships, which contribute to intangible assets, yield benefits such as improved product availability, competitive pricing compared to smaller peers, and increased sales volume.   


While Best Buy Co. has leveraged intangible assets as a source of an economic moat, it may not be sustainable enough to withstand the challenges of the highly competitive retail industry with its short product cycles and intense pricing pressures. The scale-driven cost advantages may not be significant, and other potential areas of competitive advantage such as network effect and switching costs are not well-established. Based on these factors, I conclude that Best Buy is a no-moat company.


Best Buy Co.'s performance over the past 5 years reveals inconsistent revenue growth and net income growth year-over-year. However, the company has consistently generated positive free cash flow during this period. Additionally, the gross margin percentage has remained consistent, indicating healthy profitability. It's worth noting that while Best Buy's revenue and net income growth may have been inconsistent, the company's ability to generate positive free cash flow and maintain gross margin percentage stability could indicate effective cost management and operational efficiency.

Best Buy Co.'s capital allocation strategy is encouraging. The company has consistently maintained ROE ranging from 12% to 15% year-over-year for the past 5 years, outperforming its industry average. Additionally, the ROIC has remained consistently in the 12% to 15% range for the same period, and it is higher than its WACC, indicating efficient capital allocation. Moreover, the decreasing number of shares outstanding over the past 5 years is favourable, as it may indicate management's commitment to reducing dilution and potentially enhancing shareholder value.

From a financial standpoint, there are some concerning factors to consider when evaluating Best Buy Co. Inc. While the company's debt-to-EBITDA ratio meets my requirement of being below 3.0, its debt-to-equity ratio has steadily increased over the past 5 years. Additionally, the current ratio of 0.9 is below my desired threshold of 1.0, indicating that the company's short-term assets may not fully cover its short-term liabilities, and it is worse than the industry average. However, Best Buy's interest coverage ratio of 55.5 and debt servicing ratio of 1.9% both meet the requirements of being above 3.0 and below 30.0% respectively, indicating that the company is able to cover its interest expenses and debt servicing obligations. Nevertheless, it is crucial for investors to closely monitor Best Buy's debt levels.

Investing in Best Buy Co. Inc. comes with a high level of uncertainty due to several factors. Firstly, the company lacks an economic moat within a competitive industry, which may impact its ability to sustain a competitive advantage over the long term. Secondly, the inconsistent performance in terms of revenue growth and net income growth. Lastly, poor financial health, as evidenced by a current ratio below 1.0 and an increasing debt-to-equity ratio. Therefore, investing in Best Buy would require a higher margin of safety, potentially around 45%, to account for the uncertainties and risks associated with the company. With an estimated intrinsic value of $137.21, the price range will be around $75.00 after accounting for the margin of safety.

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