EUR 850.00 For Business Accounts Only

Morningstar | Best Buy’s Service and Other Consumer Strategies Intriguing but Long-Term Industry Questions Linger

We acknowledge the steps Best Buy is taking to improve its operational efficiency and find CEO Hubert Joly's Renew Blue plan--which prioritizes online sales growth, improving the multichannel customer experience, optimizing store square footage, supply chain efficiencies, optimizing the U.S. real estate portfolio, and cutting unnecessary selling, general, and administrative costs--necessary to compete in an evolving consumer electronics retail market. Some aspects have been successful, including floor space reallocation and store-within-store partnerships with Amazon, Google, Samsung, Microsoft, and Sony; online fulfillment from existing distribution centers and stores; and shedding noncore SG&A costs. We're also intrigued by Best Buy's new service offering plans, which should benefit from a potential multiyear smart home product cycle and its ability to integrate devices from multiple original-equipment manufacturers, or OEMs, but we also expect competition for in-home services talent and rival installation and tech support offerings to lead to pricing pressure. Despite solid top- and bottom-line momentum the past two years, we still believe competition and evolving industry dynamics eroded Best Buy's once narrow moat. In our view, online retailers, mass merchants, and direct sales activity from consumer electronics OEMs have diminished Best Buy's clout with consumers. Rivals still have several competitive countermeasures at their disposal (price investments, membership program benefits, expedited shipping) while some key consumer electronics vendors increasingly take products directly to consumers and introduce trade-in programs to incentivize traffic at their own retail locations, raising questions about Best Buy's ability to profitably drive in-store and online traffic over time (providing the impetus for our outlook calling for operating margins to peak at around 5% over the next several years). Relative valuation metrics appear punitive relative to industry and historical averages and recent capital returns to shareholders should continue to increase, but we believe investors should also consider competitive and channel shift pressures.