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Best Buy's Momentum Not Sustainable

Best Buy's Momentum Not Sustainable

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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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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