Best Buy and Staples at Historical Low P/S Ratios
Two major retailers, Staples (SPLS) and Best Buy (BBY), recently they appeared on GuruFocus’ historical low P/S ratios screener. Since the start of 2011, both of these retailers have moved up in step with the S&P, which has rallied up 7.4%, but both had fallen considerably over 2011. At the same time, their revenues have increased.
Best Buy (BBY)
Best Buy has the financials of a solid company yet is perceived by many as in decline or about to be in decline. The company has had 15.4% 10-year revenue per share growth, 13.9% 10-year EBITDA per share growth, and 11% 5-year free cash flow per share growth. It also grew revenue each year for the last decade, including through the recession, and reported a record $50 billion in 2011. Because revenues increased while the stock price declined, the company is trading near a historical low P/S ratio of 0.19. It is also at near-historical low P/E of 8.5 and a near-historical low P/S of 1.4.
In the three months ended Nov. 26, 2011, Best Buy’s revenue increased 1.7% year over year to $12.1 billion. Domestic comparable store sales increased 0.9%, after declining 5% in the prior-year period. Sales from international comparable stores declined 1.7%, after increasing 2.3% in the prior-year period.
The improvement in domestic stores included the product areas of mobile computing (including tablets), appliances, eReaders, mobile phones and movies, partially offset by declines in imaging and gaming. Online domestic sales increased 20% from the prior year period. The international decline was led by lower sales in small box stores in Europe. Many investors worry about the effect of declining desktop PC sales on Best Buy’s business. Best Buy’s “computing and mobile phones” segment, however, was up 8.8% in the quarter, and the entertainment category had the biggest decline, at 9%.
The company’s gross margins have been declining, negatively affected by new measures geared toward boosting revenue and market share in-store and online.
Best Buy is also facing direct competition from Walmart (WMT) and online retailers such as Amazon (AMZN). At least one analyst so far has reported that the company gained market share in December, a critical month for retailers.
The CEO of Best Buy, Brian Dunn, in January issued a response to a lengthy Forbes piece detailing the company’s problems, in which he explained why he does not believe his company is facing obsolescence: “First, some believe the internet has made physical retailing (i.e., stores) irrelevant. There's no doubt that the internet, and the mobile web in particular, have changed the way people shop, but there is strong evidence that consumers continue to value the experience of shopping in stores. A recent study by the NPD Group, a leading market research company, notes that nearly 80% of consumer electronics revenue still moves through physical stores. Additionally, approximately 40% of customer purchases made through Bestbuy.com are picked up in one of our stores. And the truth is, traffic in our physical stores increased in our third quarter and has been trending positively for most of the year.
Finally, there are those who question the validity of Best Buy's business model. This misguided perspective is especially troubling for me, because it blatantly and recklessly ignores overwhelming evidence to the contrary. Best Buy is a financially strong and profitable company that has generated more than $2.6 billion in cash flows from operating activities in the first three quarters of the fiscal year. We also delivered positive operating income in each of the first three quarters of fiscal 2012. We grew total market share in the third quarter according to the most recent public data available. We have closed down certain operations that were not profitable, which we expect to have a positive impact on our earnings going forward. And we are focusing the company on areas where we see the greatest opportunities for growth and profit: mobile devices and connection plans; enhanced digital and e-commerce strategies; growth in our services business; and expansion of our established business in China.”
Nine GuruFocus gurus currently own Best Buy shares, with four adding to their holdings in the third quarter and one so far, John Hussman, adding in the fourth quarter.
Staples, founded in 1986, is the largest office products company in the world and engages in the office supplies, technology, furniture, copy & print, and cleaning and breakroom categories. It ranks second in the world for eCommerce sales and has stores in 26 countries.
Staples has increased its revenue per share at an annual rate of 10.3% over the last 10 years, its EBITDA by 12.2%, and free cash flow at 12.7%. Revenue has increased each year for the last decade, including through the recession. Last year, however, its stock price declined 33.5%, placing it near a historical low P/S ratio of 0.43. Staples’ P/E, P/B and P/S ratios are all actually near historical lows:
Staples’ North American Delivery sales, which increased 1.8% in the quarter, outpaced its North American Retail sales, which increased 0.5%, while comparable store sales decreased 1%. The comparable stores sales decline was due in large part to weaker sales in desktop computer, software and computer media, and partially offset by positive performance in laptops and tablets. Sales in its international operations decreased 1.9%, including the favorable impact of foreign exchange rates and a 12% decrease in store sales in Europe. The company’s European business turned negative in August, coinciding with the intensifying of the eurozone’s sovereign debt crisis.
The company’s primarily competitors are Office Depot (ODP), United Stationers (USTR) and Office Max (OMX). Staples has the best gross margins of its competitors, at greater than 26%, and the only one to increase its book value per share since 2001.
Staples is using its cash flow to invest in its current businesses and make acquisitions, as well as on dividends and share repurchases. In the fourth quarter of 2011, it planned to open 14 new stores.
See more companies at their historical low P/S ratios here. Since inception, GuruFocus’ Low P/S Model Portfolio has gained 30.16, compared to 20.56% for the S&P.