Skip to Content
Stock Analyst Update

We Maintain Our Conservative Outlook on Best Buy

The market remains ahead of the no-moat retailer's longer-term intrinsic value.


No-moat  Best Buy's (BBY) third-quarter update gave us our first look at its 2020 strategy since its September investor event, and we see few reasons to change our conservative longer-term financial assumptions. While the market appears to be reacting to isolated events, including the iPhone X launch shifting into the fourth quarter and hurricane disruptions, we're more focused on the building blocks of management's 2021 targets of $43 billion in revenue (a 2.2% CAGR from 2017-21), $1.9 billion-$2.0 billion in operating margins (4.5% operating margins), and EPS of $4.75-$5.

We believe key product cycles (smart home, TV, wearables, and gaming) and macro themes (an improving U.S. housing market driving appliance demand) will keep comps in the 3% range for at least the next two quarters before decelerating to the low single digits amid more difficult comparisons. We're also encouraged by the response to in-store smart-home departments and in-home advisor services, which should be a gradual top-line contributor. Still, with Amazon testing in-home services as part of its Kohl's partnership and with other retailers exploring similar solutions, we still have a more conservative services outlook relative to the 2021 outlook. Coupled with additional store closings in the years to come--management acknowledged that consumers are buying more small-ticket items online, thus requiring less square footage--we remain comfortable with our 2021 revenue target of $42 billion.

We're not planning material changes to our $48 fair value estimate. Fourth-quarter guidance--including revenue of $14.2 billion-$14.5 billion, domestic comps of 1%-3%, and adjusted EPS of $1.89-$1.99--gives Best Buy room for upside surprises (though potentially offset by supply chain and e-commerce investments), and an increase in planned buybacks this year ($2.0 billion from $1.5 billion) is positive for total shareholder returns. But we believe the market remains ahead of Best Buy's longer-term intrinsic value.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.