Here is a blog post I made a while back that has not worked well, yet. What do you think about Best Buy which closed at around $25 on Friday?
Chad, Interesting approach to best buy. Just going on your write up, I just had a few questions. If we assume a large portion of its EBITDA might be related to services, would it mean that the company is expending more that required resources to generate revenue from things like consumer electronics, home office and entertainment ? That would be a very wasteful and long winded way of trying to increase its service offerings. Are there any companies that offer these services without the retail front end? This is more anecdotal: I live in one of the suburban areas of London. Approximately 6 months ago, Best Buy opened up a Big Box store in a popular retail park close to where I live. A month ago it closed down obviously because it wasn’t profitable. In fact what I read in the news was that they are closing all their big box stores around the UK because they were proving to be unprofitable. To me it just seems like renting out these massive commercial properties and shutting them within just a few months is such a wasteful use of resources. I am not expert on the business but I am assuming there have to be a lot of costs associated with closing such operations down aside from the large amount of inventory they have to sell at massive discounts. A few questions about your model: 1. Dont you think the projection of discounted cash flows seem too optimistic given historical free cash flow? 2. What were your assumptions for terminal value in terms of growth? 3. What price did the company buy their shares back at? It seems like they made a bulk of their purchases at >45$ levels which could be detrimental to long term holders. They spent $45/share for a stake that would probably be worth half of that today. There is every possibility that I am wrong but it seems like they tend to spend resources quite wastefully.
i looked at best buy before and I passed. i’m not a buyer of troubled or in this case, tough industries going through big changes. Your FCF projection is nonsense if my muddled mind has read it correctly. you’re expecting this firm to have MORE FCF than it ever did? I think the assumption in this case should be it makes at most the same. bb has failed to establish itself overseas, thereby limiting its growth to America, which isn’t a bad thing, but you’re not getting any great prospects. international retailing is tough, as WMT, Carrefour will attest even if they’re not big electronic retailers. Service revenues are not customer friendly and can only go so much higher without eroding brand and customer loyalty. not the worst thing you can do, and if you hold on, case may be valuation turns up along with clarity on competitive dynamics. Looking at this thing, i don’t think a $12-15B valuation is out of the question, however, i am not certain.
The days of the big box retailer are ending. TV’s and electronic devices are all turning into commodities, and that means price convergence to online prices + a small premium some people will pay for easier returns and pickup. 3D TV’s was supposidly their next $$ product but that never took off. Now they’re pushing mobile, but you don’t need huge retail space for that. All those rows and rows of DVD’s and movies will all disappear, because it’s basically losing money. The stock is low no question about it, but people don’t want to invest in what looks like a dying business model even if it is cheap.
I’m not a seller at $25. If the big box was going to die, why are they not dead today? It’s not like Amazon was just started last year. This is certainly not a growth business but I’m not paying for growth. In fact, the market has priced in negative growth or margins deteriorating well below Amazon’s margins. All the company needs to do is hold its ground against the online retailers. Also, I think there are a couple of potential near-term catalysts for the company’s fundamentals: - This fall California is likely to force Amazon to start collecting sales tax. That should help Best Buy. - Best Buy has said they will revamp their web site this year to better compete with Amazon. This is long overdue. - Android devices are getting better and should grow non-Apple mobile/tablet revenue. - The company is buying back a ton of stock ($1.2B in 2011 which is 13% of the company). At this rate the company will be private in about 6.4 years. If the company can maintain inflationary growth, it’s worth at least $40. I could be wrong. Amazon may continue eating into market share. Apple may continue its absolute dominance of the world. California may not follow through on the sales tax. Maintaining the status quo might not be an option. Retailers might just either need to grow or die, with little in between. Best Buy might be a cigar butt. Mr. Market is good at making it tough most of the time. Being a contrarian is never easy because, by definition, you are going against what most everyone else thinks.
is inflationary growth growth that keeps up with the rate of inflation? Best Buy is better than a lot of the ideas out there for sure…
Yes, basically a very broad and potentially dangerous assumption in the electronics space that revenue keeps up with inflation.
I would be more concerned about their margins…
I actually think their service revenue will protect their margin a bit. Without it, I would be very concerned.
That’s true… it’s harder to compete in services, because brand loyalty/recognition is harder. Higher barriers to entry in many industries, and I think this would be one of them.
Chad, what about their overseas sources of revenue? although it accounts for only about 25% of revenue seems like its been growing quite steadily. Any potential there in the future? I would carefully look at the new projects they are undertaking too see how they spend it.
their international efforts have failed from what I read…i would not bet a company like BestBuy can do well overseas, retailing is not a easily transferable product…
yeah i mentioned in my earlier post that their attempt to start big box stores here in London completely flopped ( the one close to where I live shut down within 6 months of opening) but I was wondering if there was any other bright spot- thanks for clarifying. I don’t know much about this space so itd be awesome if you could help me understand - why is it that hard to transfer retailing abroad? does it have to do with already established names being hard to displace?
Best Buy has a couple of different brands internationally. They own Carphone Warehouse and The Phone House in Europe (2,440 stores), Future Shop stores in Canada (146 stores) and Five Star Electronics in China (166 stores). Here is the data (in $ million) from the international segments for the last 3 fiscal years: 2011 2010 2009 Revenue 13,086 12,380 9,945 Operating Income 83 164 112 The problem is that revenue is growing but income is not so I don’t think the international growth has much value at this point.
I look at it like this…I used to go to Best Buy several times a year. Actually, probably multiple times a month. Now I haven’t been inside one in at least three years.
i want to get into the business of selling sexy women shoes…
^genius…ahead of his time
^^ Probably ended up like Al Bundy.