Best Buy's (BBY) third-quarter update mirrored recent quarters, with favorable product cycles, innovative vendor partnerships, and new services helping to drive comps of 4.3%, while specialty labor, supply chain, and technology investments offset cost-containment efforts and dragged down adjusted operating margins by 30 basis points to 3.8%. With updated fiscal 2019 guidance calling for revenue of $42.5 billion to $42.9 billion (implying 1%-2% growth), comps of 4.0%-5.0%, flat adjusted operating margins versus fiscal 2018 (4.5%), and adjusted EPS of $5.09-$5.19--each of which strikes us as reasonable if not conservative based on product cycle momentum (smart TV/home, appliances, health, security) and other holiday merchandising initiatives--we believe investors should focus on whether Best Buy can sustain its current momentum.
We believe Best Buy's fiscal 2021 revenue target of $43 billion looks like a tap-in, with $44.0 billion-$44.5 billion looking reachable even with an evolving competitive landscape (the basis of our no-moat rating) including Apple's wider distribution plans on Amazon. That said, we don't expect the path to 2021 will be linear and assume a moderation in near-term comps (our model calls for 3% in fiscal 2020 and 2%-3% in fiscal 2021). While we're intrigued by new platforms such as Total Tech Support and GreatCall (a connected-health services platform for seniors that can unlock new service and product attachment opportunities), they will take time for consumers to adopt and will also face competition from Amazon and other retailers. We also expect price compression in some product categories like 4K TVs, which will weigh on top-line results and profitability (our model only assumes modest margin expansion the next two years as current investment projects scale back).
We're not planning changes to our $58 fair value estimate. The stock has come in and now appears fairly valued (but still a solid income play), but we'd prefer a wider margin of safety.
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R.J. Hottovy, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.