What Is Driving Our $74 Price Estimate For Best Buy?

Best Buy (NYSE:BBY) had a fairly strong fiscal 2018 (ended January 2018), as the company’s performance was mostly above its guidance and market expectations. The retailer is executing on its strategy to cut costs, optimize square footage, grow online sales and stabilize its revenue stream. The company returned to real growth in fiscal 2018, with revenue growth of 7% y-o-y to around $42 billion, primarily driven by an enterprise comparable sales increase of nearly 6%. This growth followed largely flattish revenue growth in previous fiscal years. Accordingly, we expect the company to benefit from its growth momentum in fiscal 2019 as well going forward.

We recently revised our price estimate for Best Buy upward to $74, which is about in line with the current market price. This was on account of higher expected revenues relative to our previous forecasts. We have kept our net income estimate constant at $1.6 billion in fiscal 2019 and decreased the average share count slightly to 3 billion, implying EPS of around $5.06. Further, we have also increased our trailing twelve-month P/E multiple for the company to 14.6 from a previous 12, which – when combined with the estimated EPS – gives us price estimate of $74. Our interactive dashboard details our forecasts and estimates for the company. Below we outline the key drivers of our price estimate.

Overview Of Estimates

We expect Best Buy to generate around $42 billion in revenues in fiscal 2019, and earnings of almost $1.6 billion. Our revenue forecast of $42 billion represents a year-on-year decline of around 1%. Of the total expected revenues in 2018, we estimate $38 billion in the Best Buy U.S. business and almost $4 billion in the Best Buy International business. It should be noted that Best Buy closed its 250 small mobile stores across the U.S., and therefore, we have excluded these numbers from our forecast. In addition, the company also expects these mobile store closures to negatively impact full-year fiscal 2019 revenue by approximately $225 million, with a flat to slightly positive impact on its operating income.

Best Buy continues to expect an enterprise comparable sales growth of flat to 2% in fiscal 2019. The retailer’s investments in specialty labor, supply chain and increased depreciation related to strategic capital investments and ongoing pressures in the business, including approximately $35 million of lower profit share revenue, will be partially offset by a combination of returns from new initiatives and ongoing cost reductions and efficiencies.

Best Buy Operating Divisions Forecast

We have calculated Best Buy’s total revenue in fiscal 2019 by estimating the revenues from the company’s domestic sales, international sales, and other standalone store sales. Further, we have calculated the retailer’s divisional revenues by estimating the number of stores, square footage per store and revenue per square foot in fiscal 2019. We expect Best Buy’s 2019 store count in the U.S. to be just over 1000, with an average square footage per store of 39k and revenue per square foot of $975, translating into $38 billion (flat y-o-y) in domestic revenues in fiscal 2019. In addition, we also expect close to 215 stores in international markets, with an average square footage per store of 21k and revenue per square foot of $853, translating into $3.9 billion (+1% y-o-y) in international revenues in the same period. On similar lines, we expect other standalone store revenues to reach $400 million (flat y-o-y) in fiscal 2019, with 28 stores, 26k square footage per store and $509 of revenue per square foot.

Best Buy saw its stock gain nearly 60% in fiscal 2018, and much of the growth was due to the company executing a turnaround plan called “Renew Blue” – which has now entered into growth phase after completing its turnaround phase. The consumer electronics giant has made major investments in the online business that have paid off, and shown considerable improvement in its comparable sales growth. However, the retailer’s aggressive push to keep up with online retailers such as Amazon (by investing in people and technology) is leading to pressure on margins. Going forward, we expect the company to grow, albeit at a slower pace than that of fiscal 2018. The company’s stock is up more than 5% year-to-date as of June 15.

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