Will Best Buy Survive the Retail Apocalypse?

Nobody can decide if Best Buy (NYSE: BBY) will survive the Great Retail Apocalypse. New York Times writer Kevin Roose thinks it can, but Mr. Market loudly disagrees.

Roose thinks that Best Buy’s customer service capabilities, well-stocked aisles, and ability to demonstrate the latest tech make it Amazon-proof. Skeptics would say that all Best Buy is doing is running a live demonstration area where people check out stuff they will order online once they get home.

One group of people Best Buy was not able to impress was the analysts that attended its last investor day. They started downgrading Best Buy as soon as they saw the projections for future growth, Business Insider reported. Mr. Market shared their skepticism; BBY dropped from $58.61 to $53.82 a share between September 15 and September 20, 2017.

Best Buy Value Investment or Retail Dinosaur?

Okay, so is Best Buy a value investment or a retail dinosaur on the road to extinction. That’s hard to determine because cases for both scenarios can be made from Best Buy’s financial numbers.

Best Buy’s revenues are growing, but that growth is pretty anemic, ycharts data indicates. The Best Buy Company reported revenues of $39.90 billion on 31 July 2017, up slightly from $39.42 billion in July 2016, but still down significantly from $40.33 billion in July 2015.

Yes, there is some growth, but that’s not necessarily good. The growth at Best Buy might be driven by the recent demise of Radio Shack and the ongoing collapse of Sears and Kmart. Instead of taking customers from Amazon (NASDAQ: AMZN), all Best Buy is getting are the people that used to go to Kmart, Sears, or Radio Shack.

This makes Best Buy a retail vulture feeding off the carcasses of dead; or dying, competitors rather than a company in turn around. That is not a viable growth strategy because sooner or later all the competitors will be dead. Then Best Buy will have no new sources of customers to tap.

Is Best Buy Making Money?

Value investors will need to take a second look at BBY because income figures prove it is making money, despite the limited customer base and dim future.

Best Buy did report a net income of $1.198 billion on July 31, 2017, a definite improvement over July 2016 when the figure was $1.031 billion, and July 2015 when it was $919 million. Not only Best Buy making money, but it has managed to grow its income in a very difficult retail environment.

Value investors will want to know if the added income is translating into the additional float. The answer to that question is sort of, the numbers prove that Best Buy has a little more cash. Here is what Best Buy’s cash situation looked like on July 31, 2017.

  • $306 million in free cash flow.

 

  • $3.49 billion in cash and short-term investments.

 

  • $1.94 billion in cash from operations.

  • Assets of $13.44 billion.

 

Best Buy has a lot of float for a retailer but is it a good investment. The bears would say that BBY’s limited income growth comes from former Sears or Radio Shack customers, not new shoppers.

Is Best Buy a Good Contrarian Investment?

Best Buy is an interesting contrarian investment right now because it might soon become undervalued.

September 22, 2017; ycharts data showed us that Best Buy might be overvalued. It had a market cap of $16.01 billion and an enterprise value of $14.01 billion on that day. Despite that Best Buy investors were making money.

They took home a dividend of 34¢ on September 18, 2017, and enjoyed a return on equity of 27.06% on July 30, 2017. That makes Best Buy a great contrarian play, but cynics will ask how long can that continue?

Best Buy’s Uncertain Future

The analysts are right about Best Buy’s uncertain future. The present growth seems to be driven by the contraction or disappearance of competitors as much as anything else.

Future prospects are limited given the deep-discounting capabilities of its’ two greatest rivals; Walmart (NYSE: WMT) and Amazon. There are some other threats looming on the horizon, such as the brick and mortar Amazon Store, and Amazon’s recent alliance with Kohl’s (NYSE: KSS). The Everything Store is testing returns at Kohls stores in the Los Angeles area.

A major danger is that Best Buy will turn into the demonstration center for the stuff people buy from Amazon. A particularly dangerous trend is video games sold through platforms like Netflix and Amazon Prime. People try out the game at Best Buy then go home and buy it through Netflix (NASDAQ: NFLX) if they like it.

Another is that Walmart and Amazon’s same-day delivery services get people out of the habit of shopping. There is some evidence that this is already happening among Millennials (those under 33) and Generation Xers (those between 33 and 51) who no longer regard shopping as a leisure activity.

This threatens Best Buy’s business model which is as a fun place to shop. No matter how fun a store is, it cannot compete with home, which is almost always more comfortable.

Why Best Buy needs to Join Amazon

There is a great strategy for long term and survival that Best Buy should continue. It is, stop competing with Amazon and join it.

Best Buy would be a logical partner for Amazon. A great perk Amazon can offer to some customers would be free service and installation from the Geek Squad. Best Buy stores could provide customer service and repairs for electronics ordered through Amazon.

Best Buy stores would be a great pickup and return location for Amazon merchandise. Not to mention a good neighborhood or regional base for same-day delivery services.

Why Amazon should Acquire Best Buy

Acquiring Best Buy would be a smart and logical move for Amazon.

Best Buy’s 1,026 stores would give Amazon a brick and mortar footprint for pickup and delivery. Those stores would serve as ideal locations for people to see and test Amazon merchandise and get familiar with new Amazon products such as Echo, Amazon TV, Kindle, and Fire. Best Buy could serve as Amazon’s answer to the Apple Store.

More importantly, Best Buy’s expert staff and Geek Squad would provide Amazon with a high level of customer service. The Geek Squad would serve as Amazon’s installation and service department for appliances, electronics, and other products ordered online. A great use for the Geek Squad would be to deliver and setup products ordered from Amazon.

Best Buy has some of the same attributes that Amazon saw in Whole Foods. It has a great reputation among customers, lots of customer loyalty, a strong brand and a reputation for excellent customer service. More importantly, Best Buy’s stock is fairly cheap right now. Perhaps Best Buy CEO Hubert Joley should be talking to Jeff Bezos.

A fascinating mashup would be to put mini Best Buys in Whole Foods, and Whole Foods 360 outlets in Best Buy. That way people could sip coffee while trying videogames and phones.

No matter what happens, Best Buy is a good contrarian investment in retail. If it drops below $50 a share BBY will be a tremendous bargain you should consider adding to a portfolio.