Best Buy’s Stagnant Revenue

There is another side to the retail apocalypse; that many of us are ignoring, revenue at some stores is stagnating. A good example of this is Best Buy Company (NYSE: BBY), where revenue is slowly but steadily sinking.

Back in April 2015, Best Buy reported a TTM revenue of $40.26 billion for first quarter of that year. On April 30, 2015, Best buy reported TTM revenues of $39.41 billion for first quarter 2016. This is not the revenue free fall; we’ve seen at places like Macy’s (NYSE: M) and Target (NYSE: TGT), but it is not good.

The figures indicate that Best Buy has lost revenue for every quarter since July 2015. This reverses significant TTM revenue growth the chain enjoyed between 2014 and 2015. In July 2014, Best Buy reported TTM revenues of $39.1 billion that grew to $40.33 billion a year later. Now it looks like the electronics retailer has lost most of that gain in just a year.

To make matters worse this stagnation is spreading to other areas of the earnings report. Best Buy reported a net income of $997 million at the end of first quarter; a slight increase over first quarter 2015 when the number was $901 million.

Cash from operations was up slightly rising from $1.617 billion in April 2015 to $1.815 billion this year. The free cash flow was up significantly rising from -$134 million in April 2015 to $347 million this year.

It looks as if Best Buy is only capable of very limited income growth – that can be attributed to inflation rather than increased sales. It seems to have reached a certain level of revenue and is just sitting there. Despite reports of an economic recovery; Best Buy is struggling to maintain its current level of revenue.

Middle Class Shrinkage could be Hurting Best Buy

My guess is that income stagnation; and the shrinkage of the middle class, are cutting into Best Buy’s consumer electronics business.

The Pew Research Center reported that the median income of the average middle class household in the US was 8% lower in 2014 than it was in 1999. The same survey found that the middle class had shrunk significantly in nine out of 10 of the American cities it surveyed.

Pew’s figures indicate that the average middle class household was making $77,898 a year in 1999, and $72,919 a year in 2014. That comes out to a loss of income of nearly $5,000; $4,979 to be exact, in 15 years. It also means that middle class families now have less disposable income to spend on things like stereos, TV sets, DVD players, video games and entertainment systems.

Where are Best Buy’s Customers Going?

If Pew’s figures are right; Best Buy has fewer customers, and those customers have less money to spend. These numbers might also explain the revenue growth at bottom feeding electronics and appliances chain Conn’s (NASDAQ: CONN); which specializes in easy financing.

Conn’s revenue has been growing for quite some time. It reported a TTM revenue of $1.515 billion April 2015 that grew to $1.613 billion in January 2016. One has to wonder if many of the families that were buying electronics at Best Buy; have turned to stores like Conn’s, because they can no longer afford traditional retailers.

It will be interesting to see what Conn’s earning report; which is due out on June 6 according to press releases, says. Can companies that offer financing deals escape the effects of income inequality and middle class shrinkage?

Is Best Buy a Good Investment?

Despite its revenue stagnation, Best Buy does a few things going for it. Investors were rewarded with a dividend yield of 3.03%; a return on equity of 21.73%, and a diluted earnings per share figure of 2.921 during the first quarter, ycharts reported.

Best Buy also has quite a bit of float for a mid-cap retailer; it reported cash and short-term investments of $3.065 billion for the first quarter of 2016. The company also had $12.9 billion in assets and a market cap of $10.36 billion. Interestingly enough, Best Buy is theoretically overvalued right now because it has an enterprise value of $8.67 billion.

My take is that is that Best Buy is too risky, because it is in a declining area of retail. Middle class contraction, the growth of Amazon.com (NASDAQ: AMZN) and income stagnation are slowly eating away at its customer-base. If these trends continue; Best Buy will have a hard time paying those 3.03% dividends in the near future.

Since the dividends are the only reason to buy Best Buy shares, I would tell investors to stay away. There are other safer dividend stocks out there that will keep paying out for the long term.