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Best Buy has been a favored investment for gurus such as David Einhorn, Joel Greenblatt and Leon Cooperman. However, shares of BBY continue to sink, leaving many to wonder if BBY is a classic value trap.
Best Buy Co. said Tuesday its third-quarter net income fell 29% as the electronics retailer cut prices to drives sales and traffic during the all-important holiday season. Revenue rose 2% to $12.1 billion.
Shares of BBY tumbled 12% on the news.
Net income for the three months ended November 26 fell to $154 million, or 42 cents per share. That compares with $217 million, or 54 cents per share, last year.
Perhaps most disconcerting is the fact that same-store sales appear to have plateaued. Same store sales were only up 1% from last year leading many analysts to believe that BBY must shut stores in order to maintain profitability.
Value investors have been attracted by the low P/E and clean balance sheet at BBY.
The company reaffirmed its full-year guidance of adjusted net income of $3.35 to $3.65 per share which means that shares trade at less than 8x earnings.
The company only has $711 million of long-term debt which is manageable given its steady earnings stream.
The primary concerns appear to be both macro issues and increased competition.
Best Buy has high margins and savvy consumers know that you can often save 25% by shopping online.
Secondly, many analysts feel that the U.S. consumer is tapped out and will be forced to deleverage in the coming years. Some anticipate that the glory years of increased consumer spending may be over as consumers re-trench.
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What is the difference between a computer bought at Best Buy vs Amazon? Usually, its the price. If you research beforehand, you will usually find that Best Buy's price can easily be beat. Websites like Pricegrabber.com and Slickdeals.net freely provide information on the best deals across all of retail (online and traditional brick & mortar).
Best Buy has made some clever moves such as selling their own branded electronics and accessories in the store as well as selling shelf space like a grocery store. They also have their own finance department which can turn a tidy interest profit. This, however, is offset the tremendous overhead (mostly in wages) that they must pay. Think about how many employees staff each store.
If you are paying attention, the trend is clear. On average, online retail sales have grown by more than 10% each year starting in 2001. Just go to www.census.gov and search "online retail sales".
Online retail sales are still dwarfed by traditional retailers (>3.5% in 2010), but the trend is clear. With pricing information freely available on the internet and the rough economy, prices matter now more than ever.
The biggest advantage Best Buy has is selling on a personal level. By training their staff to sell extended warranties, additional services, and accessories, they can increase their margins. Sadly, as consumers become more informed, Best Buy will come under increasing pressure to compete on price. If Best Buy has to compete on price, they will lose a long war of attrition because they cannot match Amazon's overhead savings. They must differentiate themselves and add value to the transaction. The only way to do this is to offer more services (think installation).
Do yourself a favor and look at Amazon's revenue growth vs Best Buy's. Best Buy is stalling while Amazon is posting double digit growth year over year. You can make the "bad economy" argument for Best Buy, but it doesn't hold water when you see that Amazon is chuggin along.
One other thing to consider: Amazon.com is open 24 hours a day, 7 days a week. I hate to pigeon hole this discussion into an Amazon vs Best Buy comparison, when in reality, Best Buy has to contend with the entire internet as well as Walmart.
Long story short, Best Buy isn't going bankrupt, but its long term prospects are diminished as it deals with a fundamental change in commerce. I think its safe to say this internet thing is here to stay.
There are better values to be had. I would actually recommend sitting in cash and then jumping on values as Europe blows up.
Using a conservative DCF, I find that BBY should be worth ~$30. While this represents a 30% margin of safety, I would not try and swim against the current. This stock will be under pressure for sometime.