Cash Productivity Best Buy vs. Wal-Mart’s US Stores
Best Buy (NYSE:BBY) has not had a major direct competitor in the consumer electronics market since Circuit City’s bankruptcy in 2008. However given the higher price point appeal of consumer electronics, competitors such as Wal-Mart (NYSE:WMT) have pushed aggressively into this space, and based on recent results, appear to be taking market share from Best Buy.
Below we compare the cash productivity of Best Buy and Wal-Mart. We define cash productivity as the amount of free cash flow that a retailer produces per unit of retail space. This comparison suggests that Best Buy’s cash productivity is about double Wal-Mart’s due to the higher revenue per square foot, which explains why Wal-Mart would want to sell more electronics.
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The chart below shows forecasts cash productivity for Best Buy and Wal-Mart from 2011-14.
Best Buy’s cash productivity is about $25 per square foot, which we expect to remain relatively stable in the coming years. This is about double our estimate of Wal-Mart’s cash productivity of around $13. However both companies have similar gross margins (27% for Wal-Mart and 25% for Best Buy) and similar indirect expenses (as % of gross profits) like capital expenditures, SG&A and taxes by our estimates.
This highlights the fact that the electronics Best Buy sells generate a much higher revenue per square foot than Wal-Mart and so it makes sense for Wal-Mart to want to push into this business. Its revenue per square foot figure for 2009 stood around $900 compared to only $433 for Wal-Mart.
It is interesting to note that while the two retailers are very different in terms of their business focus and customer base, their gross margins are comparable, and we do not believe that by selling more electronics we would see much impact on Wal-Mart’s existing gross profit margins.
Consumer Trends
Recent developments indicate that Best Buy is losing some market share in consumer electronics, part of which can be attributed to Wal-Mart’s efforts to drive holiday sales by offering attractive deals, free shipping and promoting online sales. Consumers appear to be holding off on buying new technologies such as 3D TV’s and home entertainment systems, in which Best Buy specializes. The more affordable new technology items like the iPad, Kindle and gaming consoles are available through many channels, including online retailers such as Amazon (NASDAQ:AMZN), and so this adds much more competition for Best Buy in these electronics.
If this trent continues, Best Buy could witness a moderation in revenue per square foot growth and consequently, reduced cash productivity which could impact the stock further.