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Best Buy (BBY) Frustrates Value Investors

December 13, 2011 | About:

Several gurus have been battered on ill-timed investments in Best Buy (NYSE:BBY).

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.

Rating: 3.1/5 (11 votes)


Roiguy - 5 years ago    Report SPAM
I know you don't want to hear it: Best Buy is a classic value trap. They cannot compete with Amazon in the long run. Both Amazon and Best Buy have distribution warehouses with staff. In addition to this, Best Buy must lease brick and mortar stores that also have to be staffed. They end up paying more in insurance, property taxes, and maintenance because of this.

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.

BEL-AIR - 5 years ago    Report SPAM
Roiguy, I can see you like Amazon so much, but what about the price?

So many people like to buy high flying stocks but they so often forget about the price...

In the case of amazon, it is only 100 times earnings...

I much rather buy bby at 4 times earnings if it keeps falling.

Value investing is buying a decent business at a decent price, sure Amazon is growing faster, but it is far to expensive. Plus some small internet sight might show up, cut costs even more and even squeeze Amazon, it would be alot easier and cheaper to compete with Amazon then with bby, people do it all the time on ebay for zero operating costs.

Just like nflx was some high flying stock and one mistake and it fell from the skies to a huge price melt down, Amazon is priced for perfection, if they make one mistake, or miss an earnings by even 1% watch out below.

Market cap is 87 billion for amazon, yet they made only 800 million.

I bet apple or intel to try to get a better return on all that cash they have doing nothing in there banks and earning zero interest rates could open up a sight that could compete with amazon for 1/100 of the market cap of amazon, amazon has a very weak moat as it would not have an initial high investment to start a website and have some basic stock as opposed to opening up all the brick and mortars of a walmart with all the prime property, distribution centers and ware houses that they have.

Plus bby abd walmart have websites with delivery as well.

Lets see were Amazon is a year from now.

Amazon is one expensive stock

Just read the story below....

Roiguy - 5 years ago    Report SPAM

I was just using Amazon as an example to show that online sales are growing while the retail sales of Best Buy are stagnating. I am not advocating for anyone to buy Amazon. No where in the article do I say that Amazon is a good investment. I believe Amazon is overvalued.

If you read the end, I say that Best Buy looks like its worth $30 but it will be under pressure for a while and its long term prospects don't look good.

Best Buy is trying hard to grow their online business but this is cannibalizing their retail sales for sure. I believe the strategy is to get people in the store and try to get them to load up on accessories and services for their purchases.

In short, my write up was about Best Buy looking like a bad buy for a value investor because of the continued growth of online sales.

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