Morningstar

Is Best Buy Back?

Though it has improved its competitive position more than many retailers, the firm will continue to face pressure from Amazon on many of its product and service initiatives, limiting growth and margin expansion potential.

Securities In This Article
Best Buy Co Inc
(BBY)

We are placing the shares under review and plan to raise our $37 fair value estimate about 15%-20%, with half the increase based on more optimistic near-term revenue growth and margin expansion and the other half chalked up to lower U.S. tax rate assumptions. We view management's second-quarter guidance (1.5%-2.5% comps, revenue of $8.6 billion-$8.7 billion, adjusted EPS of $0.57-$0.62) and updated full-year outlook (revenue growth of 2.5%, adjusted operating income growth of 3.5%-8.5%) as realistic based on its smart home/in-home advisory, tech support, inventory management and gross margin and SG&A optimization plans, as well as competitors exiting the market the next several quarters. But even with favorable near-term product cycle tailwinds, we believe the market may be getting ahead of itself, with current prices implying mid-single-digit growth and 5%-6% operating margins longer term. While Best Buy has improved its competitive position more than many retailers, we still view it as a no-moat firm that will continue to face pressure from Amazon on many of its product and service initiatives, limiting growth and margin expansion potential.

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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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