Mobile Sales Drive Margin Growth for Best Buy
We recently lowered our price estimate for Best Buy (NYSE:BBY) from about $42 to $41, largely because the company’s second-quarter earnings report reflected continued caution in U.S. consumer spending. Best Buy competes with brick-and-mortar retailers like Wal-Mart (NYSE:WMT) and Costco (NASDAQ:CSCO) in the consumer electronics business, along with online merchants like Amazon (NASDAQ:AMZN).
On the bright side, Best Buy reported improving gross margins in the second quarter, mostly driven by significant growth in its Best Buy Mobile business.
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Mobile rules
In a recent article, we noted that Best Buy’s stand-alone mobile stores are unlikely to move the stock to any significant degree because they are much smaller in size and fewer in number compared to the company’s nearly 1,100 big-box stores. However, the bulk of the company’s mobile business comes from Best Buy Mobile sections located inside big-box stores.
As shown in the chart above, we now expect overall growth in gross margins for 2010. You can drag the trend line to create your own gross margin forecast for Best Buy and see how it impacts the company’s stock.
In the second quarter, Best Buy’s margin growth was driven mainly by the mobile division, which posted the highest comparable store sales among all of Best Buy’s product categories. Best Buy Mobile’s profit margins were significantly higher than the company average. Best Buy Mobile also achieved higher than average “attach rates” for wireless service connections, Geek Squad services and accessories, meaning that a high percentage of products were sold in conjunction with these ancilliary items.
In the mobile business, Best Buy’s strategy is to combine good customer service, a broad choice of wireless plans and the most popular smartphones. It seems to be working: Best Buy now holds a 5% share [1] of the U.S. wireless market and hopes to capture about 15% eventually.
Can Best Buy’s profit margins expand further? Quite possibly yes, considering that stand-alone Best Buy mobile stores are growing at a rapid pace and the company is allocating more space for high margin categories like e-readers and gaming gadgets in addition to mobile phones.
You can see the complete $41 Trefis price estimate for Best Buy’s stock here.
Notes:
1. Taken from Best Buy’s latest earnings transcript