Skip to Content
Stock Analyst Update

Key Takeaways from Best Buy's Update

The retailer continues to improve its long-term competitive position thanks to innovative partnerships and improved customer experience, but shares remain overpriced.

Mentioned:

Our takeaways from  Best Buy's (BBY) second-quarter update are similar to previous quarters, with the company improving its long-term competitive position but the market giving the stock more than enough credit. In our view, comps of 6.2% reinforces that Best Buy is more than just a beneficiary of favorable product cycles--home theater, gaming, health and wellness, and smart home were called out as key contributors--but also innovative partnerships like its Fire TV program with Amazon and improved in-store and online customer experience. We're intrigued by new platforms such as Total Tech Support (TTS) and the acquisition of GreatCall (a connected-health services platform for seniors), which can unlock new services growth and create product attachment potential. In fact, we now believe management's fiscal 2021 revenue target of $43 billion looks conservative, with $43.5 billion-$44.0 billion reachable even with increased competition (the basis of our no-moat rating).

On the profitability front, Best Buy continues to strike a balance between investment and cost optimization. Gross margins fell 30 basis points to 23.8% due to supply chain investments and TTS rollout costs but also helped by merchandise margins. The gross margin hit was more than offset by a 50-basis-point reduction in SG&A, with cost control measures negating specialty labor investments for the aforementioned service offerings, resulting in a 20-basis-point increase in operating margins to 3.8%. While the market appears concerned about the softer-than-expected third-quarter adjusted EPS outlook ($0.79-$0.84, versus consensus of $0.92), we're comfortable with Best Buy's service investments ahead of the 2018 holidays.

We're planning to add a few dollars to our $55 fair value estimate for more optimistic near-term sales assumptions. While we recognize the scarcity value of Best Buy's recent outperformance relative to other retailers and see the stock as a solid income play, we see shares as overvalued.

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 shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.