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Best Buy a Bright Spot, but Are Results Sustainable?

We plan to ratchet up our $44 fair value estimate, and see shares as modestly overvalued today.

Securities In This Article
Best Buy Co Inc
(BBY)

Although

Domestic comps were positive across the board as the retailer continues to benefit from not only positive consumer cycles in computing, wearables, smart home, and gaming hardware/software (Nintendo Switch), but also its own customer service and multichannel efforts, which helped drive 31% online sales growth.

We believe mid-single-digit comps are achievable in the back half of the year--we expect comps toward the high end of Best Buy's 4.5%-5.5% outlook in the third quarter and low- to mid-single-digit growth in the fourth quarter--due to momentum in the aforementioned categories and upcoming smartphone launches (iPhone 8, Samsung Note). However, CEO Hubert Joly's comment that "mid-single-digit comps are not the new normal" squares with our outlook calling for low-single-digit comps over a longer horizon as current product cycles normalize, the industry consolidates, and vendors increasingly take products directly to consumers.

Management deserves a ton of credit for making Best Buy more relevant to vendors (stores within stores) and consumers (improved multichannel capabilities) while continually finding ways to re-engineer its cost structure. We're also intrigued by the upcoming Best Buy 2020 investor day, where management plans to emphasize service and multichannel capabilities, which should help from a competitive standpoint but not enough to change our no-moat rating, given similar endeavors by Amazon and other mass merchants. We plan to ratchet up our $44 fair value estimate by a few dollars to account for the second-quarter upside, but we continue to expect operating margins to peak around 5% over the next few years and view the shares as modestly overvalued at current levels.

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About the Author

R.J. 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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