Morningstar | Best Buy Finishes a Strong Fiscal 2019, but We See Fewer Opportunities for Upside Surprises Ahead
With solid fourth-quarter fiscal 2019 results (comps of 3%, revenue at the high end of its $14.4 billion-$14.8 billion target, and 30 basis points of operating margin expansion to 6.7%) helping Best Buy to achieve its fiscal 2021 targets ($43 billion in revenue, $1.9-$2.0 billion in operating margins, 4.5% operating margins, and EPS of $4.75-$5.00) two years ahead of schedule, we've turned our focus on what investors can expect in the years to come.As we discussed in our third-quarter update, we now see revenue of $44.0 billion-$44.5 billion as a reasonable assumption for fiscal 2021 even against an evolving competitive landscape--the basis of our no-moat rating--that includes broader distribution plans by key vendors like Apple. That said, we see fewer opportunities for Best Buy to outperform the high end of its fiscal 2020 comp guidance of 0.5%-2.5% due to price compression in product categories like 4K TVs and potentially gaming, extended mobile phone replacement cycles, and potentially new sources of competition for new platform like Total Tech Support and GreatCall (a connected-health services platform for seniors). While we believe Best Buy possesses greater operating leverage due to recent cost-cutting efforts (including $255 million in fiscal 2019 and $1.9 billion since the Renew Blue plan was announced in 2012), but ongoing services specialty labor, supply chain, and technology investments will limit near-term margin expansion opportunities. Taken together, management's outlook calling for $42.9 billion to $43.9 billion in revenue, flat enterprise operating margins of 4.6%, and adjusted EPS of $5.45-$5.65 appears reasonable for fiscal 2020.
We're not planning changes to our $58 fair value estimate beyond time value of money adjustments. Shares appear fairly valued--but still a solid income play, especially with a new $3 billion share buyback authorization--but we believe better entry points may arise if Best Buy can't maintain momentum in fiscal 2020.
Best Buy provides computing and mobile phones, consumer electronics, appliances, entertainment, services and other products. The company operates two reportable segments: Domestic, which is comprised of the operations in all states, districts and territories of the U.S. under various brand names including Best Buy, bestbuy.com, Best Buy Direct, Best Buy Express, Best Buy Mobile, Geek Squad, GreatCall, Magnolia and Pacific Kitchen and Home; and International, which is comprised of all operations in Canada and Mexico under the brand names Best Buy, Best Buy Express, Best Buy Mobile, Geek Squad and the domain names bestbuy.ca and bestbuy.com.mx.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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