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 current priorities--including online sales growth, improving the multichannel customer experience, optimizing the store square footage of its U.S. real estate portfolio, enhancing supply chain efficiencies, and cutting unnecessary 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, like Total Tech Support and GreatCall, a connected-health services platform for seniors. We believe Best Buy's service offerings can benefit from a potential multiyear smart home product cycle and its ability to integrate devices from multiple manufacturers but may also face competition for in-home services talent and pricing pressure from rival installation and tech support offerings. 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 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 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 weigh competitive and channel shift pressures.