Online Sales Probably Won’t Lift Best Buy’s Revenue Per Square Foot
Like most big retailers, Best Buy (NYSE:BBY) has been upgrading its e-commerce capacity of late. Best Buy has partnered with Google (NASDAQ:GOOG) to create mobile and Web-based shopping apps. The company has also made its website more user-friendly and optimized it in an effort to boost sales.
Best Buy is the largest consumer electronics retailer in the U.S., where it competes increasingly with Wal-Mart (NYSE:WMT). Although e-commerce could reduce Best Buy’s cost structure over the long term, we don’t expect the company to abandon the big-box format that is so critical to its image.
Moreover, online sales often come at the expense of physical store sales. As a result, we don’t think e-commerce will boost Best Buy’s revenues per square foot significantly during the Trefis forecast period. Our analysis follows below.
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Growth of e-commerce
Total U.S. online retail sales are expected to grow at an average annual rate of 10% over the next four years, rising from $155 billion in 2009 to $250 billion in 2014, according to a Forrester Research study. During same period, the online contribution to total retail sales is expected to rise from 6% to 8%, according to Forrester data cited in Techspot.
Mobile e-commerce is a particularly hot area. Again citing Forrester data, Retailer Daily reports that about 75% of online retailers either have mobile sales capacity or plan to acquire it.
Online sales could lower Best Buy’s store costs
When consumers buy products from Best Buy online, they have three options to get their hands on the merchandise. These include in-store pickup, warehouse pickup and shipping directly to the customer.
In-store pickup requires Best Buy to either keep the item in the store or else ship it from a distribution center to the store. Warehouse pickup and direct shipping remove retail stores from the sales equation. If Best Buy starts to sell more products online, its total store space requirements are likely to go down. In this scenario, Best Buy could reduce physical retail space in order to cut operating costs.
In reality we don’t expect Best Buy to shrink its physical stores, given that the big-box showroom format is so critical to its brand image. Nevertheless, e-commerce growth does give Best Buy an opportunity to boost its net margins by reducing sales, general and administrative (SG&A) costs as a percentage of gross profits. You can drag the trend-line in the chart below to create your own SG&A cost forecast for Best Buy and see how it impacts the company’s stock price.
U.S. revenue forecast
We currently expect slow but steady improvement in revenue per square foot (an important retail metric) at Best Buy’s U.S. stores, rising from $907 in 2009 to nearly $1080 by the end of our forecast period. The growth should be driven by the improving U.S. economy, by the disappearance of main competitor Circuit City, and by the increasing strength of Best Buy’s online sales channel.
Because a significant portion of Best Buy’s online sales will likely cannibalize in-store sales, we don’t expect e-commerce growth to boost the company’s revenues per square foot significantly.
In the next interactive chart you can drag the trend-line to create your own forecast for Best Buy’s revenue per square foot from U.S. stores, and see how it impacts the estimated stock price.
You can see the complete $42.03 Trefis price estimate for Best Buy’s stock here.