RETURNING FOR 2020

AGGRESSIVE GROWTH

Best Buy, Inc.

Ticker symbol: BBY (NYSE) Image Large Cap Image Value Line financial strength rating: A Image Current yield: 2.7% Image Dividend raises, past 10 years: 10

Company Profile

Call us “stock environmentalists” if you will. Why? Because every now and then we see it fit to “recycle” an old stock back on to the 100 Best Stocks list. Sometimes we take a company off the list because its fortunes and/or its business model simply hasn’t kept up with the times; markets dry up, competitors take over, and so forth. This is a “slow” denouement from the list. Other “faster” denouements occur when a company is acquired or goes through a sudden change (or the whole industry, for that matter) rendering it unattractive in a hurry and due for replacement. Anyone remember General Electric?

The removal of Best Buy from our list in 2013 was an example of the “slow” denouement, where the competitive pressure of online sales and most particularly Amazon seemed to be taking over Best Buy in the marketplace, to the point where customers didn’t “defect” completely but rather used Best Buy’s expensive real estate as a “showroom” to observe a product in action and in person—then get the ol’ phone out and order it online. Such a business model did not appear destined for long-term success.

So what puts a company like Best Buy back onto our list? What causes us to “recycle” it back into a 100 Best pick? It’s usually one or a combination of two things: (1) a definitive and executable strategy to combat the afflictions that put it out into the heap in the first place, (2) changing market conditions that move toward where the company already is.

Best Buy serves as a good example of recycling a company due to both these merits. They weren’t going to take the “showrooming” thing lying down and decided one of the best ways to combat the online threat was to provide service—real service—to customers buying complex technology products to differentiate it from the online offering. “Service” in this case means not only fix-and-repair service, but also help in applying a product to a customer’s home needs. What router do I need? What theater sound system works best in my home environment? What home security system do I need, and how do I set it up to work on my smartphone? Secondly, the marketplace moved their way, for with the demise of Circuit City, H.H. Gregg, and other consumer electronics superstores, they found themselves not just at the top of the heap but as the whole heap, in a good position with the addition of Geek Squad, Total Tech Support, and In-Home Advisor offerings. Welcome back, Best Buy!

Best Buy operates a total of 1,415 stores, 1,005 of them the familiar “big-box” yellow-signed retail format stores mostly in suburban locations across all 50 states, D.C., and Puerto Rico, 132 in Canada, 161 in Mexico, 45 Best Buy Mobile each in Mexico and Canada, 21 contractor-oriented Pacific Sales, and six Best Buy Express stores. By product category, 44 percent of 2018 sales were computing and mobile, 33 percent were consumer electronics, appliances 10 percent, entertainment (media, etc.) 8 percent, services 5 percent.

Two years ago, as Amazon and others appeared to be eating all of brick-and-mortar retailers’ lunches, Best Buy among many, and perhaps more than most, recognized the need for change. Simply trying to discount their way past Amazon would not get them to the finish line ahead, as Target realized at about the same time in 2016–17. (See Target, another 2020 100 Best stock.) In late 2017, Best Buy announced its “Building the New Blue” strategy.

The overarching purpose of “Building the New Blue” was to “enrich our customers’ lives through technology.” Of course, the internal purpose was to add enough value to the sale through service and assistance before, during, and after the sale to differentiate the offering in the customer’s eyes; to get the customer to pay a little bit more and forgo the Amazon opportunity. “Building the New Blue” recognizes that Best Buy is uniquely positioned to deliver this value with its in-store and on-site service offerings. The company is capitalizing through several platforms, including:

Financial Highlights, Fiscal Year 2018

FY2018 revenues were up 7 percent on a same-store comp gain of 5.6 percent; net earnings were up 19.4 percent on a 0.3 percent gain in net profit margin (not bad on a 3.2 percent base) and per-share earnings rose over 20 percent on a 6 percent share buyback and a 32 percent dividend increase. While mobile and gaming are slowing down and saturating somewhat, BBY recognizes the opportunity in home theater, security, and other “home” platforms and plans to make the most of the service offerings. Sales are expected to rise about 7.5 percent annually through 2020 with a flat to 2 percent rise in earnings in 2019 as the mobile market matures and continued investments are made and 7–9 percent in 2020 as the “Building the New Blue” strategy takes hold.

Reasons to Buy

Quite simply, we think Best Buy has effectively addressed the strategic gap that had been emerging between it and the online competition. Moreover, other marketplace winds blowing its way include the demise of brick-and-mortar competitors and the impending of the fully integrated “smart” home as a complete electronically driven system with smartphone-driven remote control and 5G and IoT networked devices throughout. We like how Best Buy is evolving their offerings to capitalize on the smart home evolution.

Reasons for Caution

The consumer electronics space is still extremely competitive, and new technologies can cause retailers to run short of the latest and greatest while becoming stuffed to the gills with too much “older” or out of favor items. The current saturation in mobile and gaming devices and to a lesser extent appliances serves as an example.

SECTOR: Retail Image Beta coefficient: 1.20 Image 10-year compound earnings per-share growth: 3.0% Image 10-year compound dividends per-share growth: 11.5%

 

2011

2012

2013

2014

2015

2016

2017

2018

Revenues (bil)

50.0

44.0

40.6

40.3

395

39.4

42.1

42.9

Net income (mil)

1,365

863

721

916

973

1,148

1,357

1,498

Earnings per share

3.61

2.54

2.07

2.60

2.78

3.58

4.42

5.32

Dividends per share

0.62

0.66

0.68

0.72

0.92

1.12

1.36

1.80

Cash flow per share

6.68

5.34

4.17

4.47

5.03

5.79

7.21

8.54

Price:

high

36.3

28.0

44.7

41.0

42.0

49.4

69.0

84.4

 

low

21.8

11.2

11.4

22.2

28.3

25.3

41.7

47.7

Website: www.bestbuy.com