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By R.J. Hottovy, CFA | 08-29-2017 02:00 PM

Best Buy's Momentum Not Sustainable

The retailer's management is doing a good job in making the firm relevant to vendors and customers, but current growth rates can't be sustained over the long term.

Despite offering investors one of the rare bright spots during an otherwise tepid retail reporting season, shares of Best Buy plunged on Tuesday over concerns that that the firm's strong second-quarter results aren't sustainable.

The retailer continues to benefit from not only positive consumer cycles across a number of categories, but also its own customer service and multichannel efforts, which have helped to drive 31% online sales growth. All-in, comparable-store sales growth was up 5.4%. We think that level of growth is achievable for the rest of the firm's fiscal year, partially thanks to upcoming smartphone launches. But we agree with CEO Hubert Joly that this kind of growth is not the new normal. Over a longer horizon, we think low-single digit comp growth is more reasonable as current product cycles normalize, the industry consolidates, and vendors increasingly take their products directly to consumers.

Best Buy management deserves a ton of credit for making the retailer more relevant to vendors and consumers while continually finding ways to re-engineer its cost structure. But we don't think the firm has earned an economic moat and although we plan to modestly increase our fair value estimate, we see shares as modestly overvalued today. 

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