How is BestBuy (BBY) Making Money?

BestBuy (BBY) is bucking retail trends and earning journalistic respect by making money.

The electronics retailer is developing a cult following because it survives in the Age of Amazon (NASDAQ: AMZN). Uniquely, Best Buy is partnering with Amazon and Apple (NASDAQ: AAPL) rather than competing with them.

For instance, BestBuy is selling 10 Amazon Fire TV sets in its stores. Moreover, they designed the Fire TVs  to stream Amazon Prime, HBO, Sony’s Playstation Vue, Netflix (NASDAQ: NFLX), and Hulu, CNN reports. You can even control the Fire TV with Alexa.

In addition, BestBuy (NYSE: BBY) operates Apple Brand Stores in its locations and online. Thus, BestBuy is coopting one of its biggest direct competitors the Apple Store.

Why BestBuy (BBY) needs Amazon and Apple

BestBuy (BBY) needs Amazon and Apple as partners because of limited resources.

For instance, BestBuy reported $2.33 billion in cash and short-term investments on August 4, 2018. Hence, BestBuy lacks the resources to create something like the Fire TV.

Amazon, on the other hand, has lots of extra cash. For example, Amazon reported $29.765 billion in cash and short-term investments on September 30, 2018. In addition Apple reported $70.97 billion in cash and short-term investments on the same day.

Therefore, BestBuy is solving one of the biggest problems facing traditional brick and mortar retailers a limited supply of cash. BestBuy solves the cash crunch problem by partnering with the cash-rich tech giants.

Is Partnering with Amazon and Apple a good idea for BestBuy (BBY)?

There are serious drawbacks to a partnership with Amazon or Apple. For example, the giants could pull out whenever they want.

Notably, Amazon or Apple could dump BestBuy if they got a better offer. A partnership offer from Walmart (NYSE: WMT), Kroger (NYSE: KR), or Target (NYSE: TGT) for example.

Tellingly, BestBuy only has 257 stores in the United States. Conversely, Target operates 1,822 stores in the United States. In addition, Kroger operates 2,782 supermarkets and Walmart had 6,383 American stores in 2017. Thus, BestBuy’s small size could doom its cozy relationship with Amazon.

The Problem with Partnerships at Best Buy (BBY)

Amazon itself could back out the relationship in favor of electronics sales through its own stores. Notably, Amazon is planning to open 3,000 Go Cashierless convenience stores in the United States.

NILES, IL – JUNE 06: “Geek Squad” agent Eric Fortuna (R) assists customer Charles King at a “Geek Squad” computer repair facility in a Best Buy store June 6, 2006 in Niles, Illinois. Best Buy is reportedly testing their “Geek Squad” computer service and technical repair in ten Office Depot stores in Orlando, Florida. (Photo by Tim Boyle/Getty Images)

Another problem is that Amazon and Apple are able to dictate inventory and operations to BestBuy. For example, BestBuy had to stop selling the Apple Roku TV set in order to get Amazon Fire in its stores. What happens if Jeff Bezos calls BestBuy HQ one day and says, “throw Apple out or I pull Fire from your stores?”

BestBuy could offset such dangers by seeking other partnerships. For instance, BestBuy could partner with Kroger, Target, Walmart, Macy’s (NYSE: M), or Nordstrom (NYSE: JWM).

BestBuy (BBY) could open stores inside Macy’s or Nordstrom department stores, Kroger Marketplaces, Meijer supercenters, Lowe’s stores, Home Depots, or Walmart and Target supercenters. Beyond that, BestBuy could open hybrid locations with Nordstrom Local or smaller retailers like Kohl’s (NYSE: KSS) or Barnes & Noble (NYSE: BKS).

Nordstrom already has Tesla Stores inside of its locations. Meanwhile, Kroger operates pizzerias, banks, Starbucks, and jewelry stores in its Marketplaces.

Thus, BestBuy could fit right in there and at Nordstrom’s ship-to-store concept Local. To clarify, customers could collect BestBuy orders at Nordstrom Local; or Amazon Go, and have them serviced by the Geek Squad.

Is Best Buy Making Money?

BestBuy (BBY) needs more partnerships because it is not making that much money.

For instance, BestBuy recorded an operating income of $335 million and a net income of $244 million for 3rd Quarter 2018. However BestBuy recorded a gross profit of $2.229 billion on revenues of $9.379 billion for the same period.

Beyond that BestBuy reported an operating cash flow of $904 million, an investing cash flow of $127 million, and a free cash flow of $710 million in 3rd Quarter 2018. Thus, BestBuy has a cash rich business.

On the other hand, BestBuy needs to keep more of that cash. The partnerships are important because they could give BestBuy more cash flow without costly expansion.

Is BestBuy a Value Investment?

BestBuy (NYSE: BBY) is a good dividend investment right now because it paid on a dividend of 45¢ on 9 October 2018. That is a good payout for a stock that was trading at $71.89 on 2 November 2018.

BestBuy offers investors six years of dividend growth, a dividend yield of 2.55%, a payout ratio of 35.2%, and an annualized payout of $1.80. That is superb for a retailer with such a small footprint.

Impressively, BestBuy’s dividend has grown by 11¢ in 2018. In detail, BestBuy shareholders received a dividend of 34¢ in November 2018.

Despite the dividend, I think Mr. Market overpriced BestBuy at $71.89 on 2 November 2018. I believe the market overprices BestBuy; because of its small size and vulnerability to larger, richer competitors like Amazon, Walmart, Lowes (NYSE: LOW), and Home Depot (NYSE: HD).

Investors should wait until BestBuy (BBY) falls below $60 a share to buy it. Despite its popularity, BestBuy is still a very a weak retailer.