How Best Buy Can Benefit From HHGregg’s Closure

Struggling electronics and appliances retailer HHGregg recently announced the closure of all its 220 stores by the end of May this year. The company was facing significant declines in revenues and comparable sales over the past few years, and after its restructuring deal fell through, the closure was announced. With the closure of HHGregg’s stores, annual revenues of nearly $2 billion are up for grabs, and we believe Best Buy (NYSE:BBY) can capture some of this business. This could provide a much-needed boost in revenues for Best Buy as the company struggles to grow. Around 60% of HHGregg’s revenues came from appliances and 35% from electronics. While electronics form a significant part of Best Buy’s revenues, the company has also increased its focus on appliances. There are several competitors in the appliances segment, but even if Best Buy is only able to capture a small portion of HHGregg’s market share, it could have a meaningful positive impact on Best Buy’s revenues. We currently forecast a steady decline in Best Buy’s revenues over the coming years, as shown below.

However, if the company is able to grab around 25-30% of HHGregg’s business, and use other initiatives such as omni-channel marketing to cultivate them going forward, its revenue decline could be arrested. 30% of HHGregg’s revenues would amount to over $500 million in incremental annual revenues for Best Buy. This could offset around half of the currently forecast $1 billion decline in revenues between 2017 and 2018.

We expect Best Buy’s revenue per square foot to decline steadily over our forecast period. However if this decline is slower as the company gains market share from HHGregg’s closure, there could be an upside to our price estimate.

Best Buy has been able to meaningfully grow its digital sales in the past year through a focus on faster shipping, a more streamlined process and the integration of its offline and online channels (see: Is Amazon No Longer A Threat To Best Buy?). However, the company is still struggling to grow revenues as consumers move away from offline channels to purchase appliances and electronics. The closure of HHGregg should give Best Buy some room for expansion, although other players such as JCPenney are also in the fray. We expect that Best Buy will be able to capture some incremental revenues going forward, but it may not be enough to lead to a significant upside to our price estimate.

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