Can Best Buy Correct Product Missteps?
Best Buy (NYSE:BBY) released its 3rd quarter earnings and the market promptly lopped 15% off its stock price. Best Buy competes with a handful of companies selling consumer electronics such as Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST), Radioshack (NYSE:RSH) and online retailer Amazon (NASDAQ:AMZN). The company disappointed in terms of sales expectations leading us to lower our price estimate for Best Buy’s stock to $38.48. Our price estimate still stands above the current market price as we believe that Best Buy will be able to adjust and grow its sales going forward.
Interestingly, Best Buy’s earnings release coincided with several reports citing positive consumer and business sentiment and improving US retail sales. You can see our previous article (Will Best Buy’s Earnings Miss Weigh on Wal-Mart?) where we discuss these reports. This indicates that Best Buy’s sales have suffered because of some factors specific to the company. Below we discuss these and show that if this continues, Best Buy’s share price could languish as a result.
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Wrong Inventory Mix
From what Best Buy stated in its recent earnings transcript, it seems that the electronics retail giant misjudged consumer demand for newer technologies. The company expected good sales of products like 3D TVs, IPTVs, notebooks which was clearly not the case.
As it turned out, consumer adoption of 3D TVs fell below the expectations of Best Buy. We wrote an article previously (3D TV May Not Boost Best Buy Stock) where we discussed our belief that it will take a long time for 3D TVs to gain adoption. Additionally, notebooks demand fell short of expectation in-part due to increased adoption of tablet computers. The company also stated that some consumers have delayed their purchases as they are still deciding between tablets, notebooks and netbooks.
While Best Buy focuses on premium brands, most of the TV industry promotions has been centered around 2nd and 3rd-tier brands leading to their higher sales. Clearly it seems that the consumers are not yet willing to buy high priced goods despite their technological advantage and brand recognition.
Underestimating Wal-Mart, Amazon
While Best Buy gained some market share in 2009 due to Circuit City’s demise, the low hanging fruit seems to be gone. Retailers like Wal-Mart and Amazon are taking some of Best Buy’s consumer electronics market share with the help of their promotional discounts and offers as well as effective online sales strategies. Best Buy estimates that it lost approximately 1.1% market share in the 3rd quarter. [1]
We also think that Best Buy may have put too much focus on the expansion of its mobile business which could have led to missteps in planning its electronics businesses lineup (TVs). Although we expect the company to adjust its inventory based on some very clear signs consumer trends, if lackluster sales continue in 2011, its U.S. revenue per square foot figure could suffer further.
In a scenario where Best Buy’s revenue per square foot for the U.S. stores remained flat going forward, our Best Buy’s price estimate could see downside of close to 4%. You can modify the chart below.
You can see the complete $38.48 Trefis price estimate for Best Buy’s stock here.
- Best Buy’s Sales Suffer as Shoppers Chase Deals, Wall Street Journal, 14th Dec 2010 [↩]