Last Man Standing

Amazon has a long history of killing big-box retail stores. They wiped out K-Mart, Circuit City, Borders, Sears, Toys R Us, and so many others.

Yet somehow, despite all odds, Best Buy (BBY) has held its own against the behemout. 

In fact, over the last ten years, the company’s stock has returned over 500%. 

But with shares down 35%, investors are wondering if it’s a buy at these levels. 

It’s the fifth most searched electronics and entertainment products retailer among financial pros over the last month. And many folks wonder whether it can survive the upcoming recession.

Best Buy’s Business

Best Buy (BBY) is a specialty retail store that sells consumer electronics, appliances, and entertainment products in-store and online. 

The company operates over 1,000 stores across the United States and Canada. 

The business is broken into: Computing and Mobile, Consumer Electronics, Appliances, Entertainment, Services, and Other. 

BBY is the largest brick-and-mortar electronic store in the United States, despite many vanishing since the pandemic. 

Over the years, the company implemented several strategies to avoid being another victim of “The Amazon Effect.” 

This includes of Geek Squad, a tech support department that allows customers to come to the store and drop off their electronics to get fixed as well as In-Home Advisor Program, where experts go to the customers’ houses to fix their tech issues. 

In addition, BBY offers price matching to create an incentive for customers to buy in-store or from its website. The old joke was that consumers would go to Best Buy to look at the product, then go online and buy it from Amazon. 

Moreover, BBY created mini-store displays for companies like Samsung and Apple, giving consumers a better experience than they would online.

Today, approximately 31% of Best Buy’s total domestic sales are generated online, almost twice as high as pre-pandemic Q2 FY20. 

When you think about it, that’s astounding the company manages to turn a profit with such a large physical footprint.

Financials

BBY grew revenues consistently from 2017 to 2021, going from $42.1 billion to $51.7 billion. 

However, sales slowed in 2022 amidst macroeconomic headwinds. Its 12-month trailing revenues are $49.2 billion.

Despite anticipating slower sales growth in FY23, it’s in a decent financial position to weather the economic storm. BBY has a total cash position of $965 million, total debt of $4.05 billion, and a current ratio of 0.96x.

Year-to-date, management returned $862 million to shareholders through share repurchases of $465 million and dividends of $397 million.

Valuation

BBY trades at a P/E GAAP ratio of 8.78x, notably lower than its 5-year average of 14.7x. 

Moreover, its P/E GAAP ratio is significantly smaller than competitors in its space, including Walmart(WMT), Amazon (AMZN), Target(TGT), and Costco(COST). 

BBY trades at a price-to-sales ratio of 0.3x, clearly better than Walmart’s 0.66x, Amazon’s 1.87x, Target’s 0.7x, and Costco’s 0.95x  

Across nearly every comparable valuation measure, Best Buy is cheap.

Profitability

BBY runs a gross profit margin of 21.8%, weaker than competitors TGT at 26.2%, WMT at 24.6%, and AMZN at 43.0%. However, it’s important to note that Amazon generates most of its profits from web services and subscriptions. 

Best Buy’s net income margin of 3.6% is actually higher than AMZN, WMT, and COST. Only TGT beats them out at 3.9%. 

Moreover, Best Buy’s 49.0% of return on equity is vastly superior to the competition, with its closest competitor, Target, at 33.1%.

In addition, BBY has a higher EBIT margin than WMT, COST, and AMZN. TGT is slightly higher at 5.4% compared to Best Buy’s 4.7%. 

Growth

BBY experienced exceptional growth during the pandemic thanks to stimulus checks and individuals spending more time in their homes. 

Naturally, that level of growth has slowed down. 

However, it’s been a relatively modest decline, given the economic headwinds, with revenue growth (YoY) is down -5.7%.

Meanwhile, its competitors have managed to keep revenue growth positive, with COST showing the best results at 15.8%. 

Our Opinion 8/10

Best Buy forecasted a challenging 2023. Discretionary spending typically declines during a recession. 

However, one could argue that much of the bad news has already been baked into the stock price. Shares are down 35% year-to-date, and the stock trades at a relatively low valuation. Plus it offers investors an attractive dividend yield of 5.3%. 

We believe now is an excellent time to start building a starter position and load up if it dips in the $50 range. 

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