Is Amazon No Longer A Threat To Best Buy?

In its Q2 2017 results, Best Buy (NYSE:BBY) reported a 24% revenue growth in its online channel, with its e-commerce business amounting to nearly 11% of its total sales in the quarter, 200 basis points higher compared to the previous year. (Read Key Takeaways From Best Buy’s Q2 Earnings). While comparable sales for the company increased by less than 1% in the quarter, the growth in e-commerce sales is a sign that the company’s digital initiatives are showing results. Best Buy has been taking several initiatives to boost its online channel, including: 1) testing same day delivery to major metropolitan markets across the U.S.; ) creating  an in-home consultation service; and, better integrating the in-store and online shopping experiences.  We see that a majority of Amazon’s revenues are from the sale of electronics, and we believe Best Buy’s efforts to bolster its online channel are showing results.    The company has the  advantage of a strong store network through which to demo products, which can give it a competitive edge over Amazon in the long term.

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Store Network Can Provide A Competitive Edge

Best Buy believes that the continued improvements to its digital customer experience have resulted in the high growth in its e-commerce sales. A wide range of changes have enhanced the overall online consumer experience leading to higher sales. These include: 1) faster shipping; 2) a more responsive design; 3)  a more streamlined check out process; 4) improved search functionality; and, 5) better product recommendations.  However, the biggest advantage which Best Buy has over e-commerce retailers such as Amazon is its wide store network where consumers can “experience” a product before actually buying it. On its online platform, the company shows consumers relevant products that are available at a store near them. Consumers can visit the store to view a demo of the product, before they proceed to buy it online. While earlier the online purchase happened on Amazon, with Best Buy’s improved online platform, customers are now shopping on its own e-commerce website.  This integrated channel is relevant for new product launches, especially products which use complex technology. Virtual reality headsets are an example of new products that consumers are  likely  to “try” at a Best Buy store, before the actual purchase. The company believes that its store network is its key asset and is continuing its effort to integrate the online and offline experiences.  Best Buy is investing in a trained team of associates at its stores who can explain product features and provide detailed demos. The company believes that online and offline sales are intertwined and both channels are critical for overall revenue growth. We believe this strategy is paying off as is visible from growing online sales and overall increase in comparable sales.

According to our estimates, Best Buy’s revenue per square foot for its U.S. stores will decline gradually from around $905 in 2016 to nearly $875 by the end of our forecast period, after a moderate increase in the next two years.

Initiatives to drive multi-channel sales can increase this revenue and improve the valuation of the company. There can be a 10% upside to our price estimate, if the company is able to arrest this decline in revenue per square foot and if this metric reaches around $980 by the end of our forecast period.

We believe Best Buy has an advantage over an “e-commerce only” player with its ability to allow consumers to experience products at its stores before the actual purchase. Through a more robust e-commerce platform, the company can ensure that the actual purchase happens either on its online channel or in its store and this can drive revenues in future. The company is making continuous improvements to its online channel and we believe it can provide tough competition to Amazon in the long term.

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