Description
Best Buy Co. Inc, (“Best Buy”, “BBY”, or “the Company”) is a Richfield, Minnesota-headquartered retailer with physical operations across North America. The Company had 1,144 stores as of YE FY 2022, with 984 within the U.S. (Domestic) and 160 in Canada (International) segments. BBYs store portfolio is highly concentrated, with California (135 stores / 14% of total domestic), Texas (98 / 10%), Florida (61 / 6%), New York (49 / 5%) and Illinois (43, 4%) representing 39% of the total Domestic footprint. BBY’s 160 stores within International are split between Ontario (69 / 43%), British-Columbia (27, 17%) Alberta (24 / 15%), and Quebec (23, 14%). Roughly 95% of the store portfolio is leased. BBY combines omnichannel capabilities and vendor store-within-a-store concepts to allow closer vendor partnerships and a higher quality customer experience.
BBY claims to “continuously look for opportunities to optimize [its] store space, renegotiate leases and selectively open or close locations to support [its] operations.”
BBY sells products across six key categories, including:
1) Computing & Mobile Phones - desktops, notebooks and peripherals, mobile phones (incl. related mobile network carrier commissions), networking, tablets and wearables (including smartwatches);
2) Consumer Electronics - digital imaging, health and fitness products, home theater, portable audio (including headphones and portable speakers) and smart home;
3) Appliances - large appliances (including dishwashers, laundry, ovens and refrigerators) and small appliances (including blenders, coffee makers and vacuums);
4) Entertainment - drones, gaming (including hardware, peripherals and software), movies, music, toys, virtual reality and other software;
5) Services - consultation, delivery, design, health-related services, installation, memberships, repair, set-up, technical support and warranty-related services; and
6) Other - other product offerings, including baby, food and beverage, luggage, outdoor living and sporting goods.
Like other leading retailers, BBY has developed digital capabilities to both conveniently meet its customer’s shopping behaviors, as well as to improve product availability and delivery times. Customers within BBY’s Domestic and International segments who purchase product online have the choice to pick up product at a Best Buy store (including curbside pick-up at most stores), at an alternative pick-up location or take delivery direct to their homes.
Most of BBY’s merchandise is shipped directly from manufacturers to its distribution centers. According to management, BBY’s ship-from-store capability has allowed the Company to improve product availability and delivery times, which aids in converting sales and driving repeat business.
Where BBY most differentiates itself from other retailers is within its Services offerings. BBY provides customers a full suite of services to complement its product offerings, including consultation, delivery, design, installation, memberships, protection plans, repair, set-up, technical support, and health, safety and caregiving monitoring and support. While Services is a low percentage of consolidated revenue (5% of total FY 2022 revenue and 5% in Q2 FY 2023), Best Buy is leaning into this capability, attempting to position in the minds of consumers as a trusted source of technical expertise and a valuable ‘second opinion’ to the customer’s own primary research.
I think BBY is a short given retail macroeconomic dynamics, as well as the fact that BBY's Totaltech offering will not move the needle on earnings or cash flow.
1. Can Best Buy sell consumer electronics at pre-pandemic gross margins, or will industry-wide inventory issues and inflation-impacted consumer hurt revenue, earnings and cash flow?
The current debate between retail bulls and bears is focused on a few key questions:
1. The health of the consumer in 2023 amid double-digit inflation.
2. The level of promotional activity required to clear remaining inventory bloat in 2H 22 / 2023 relative to 2019.
3. Normalized gross and operating margins relative to 2019, and
4. The extent of unit growth v. price growth in 2023.
Companies answering these questions directly at Goldman Sachs’ September 7th, 2022 Global Retail Conference gave decidedly mixed responses, and therefore not much can be gleaned.
Accurately assessing the health of the consumer is a challenge. Bank of America Merril Lynch sees US Goods consumption around 5% above pre-pandemic levels.
This is despite Michigan Consumer Sentiment Index hovering around 4yr lows across all terciles of income levels.
Inflation is a top concern as it impacts the level of real spending by consumers. Consumer Price Index (CPI), a widely quoted (but potentially understated) data set tracking inflation is up 8.5% YoY in July, while Personal Consumption Expenditure (PCE) inflation is up 6.3% YoY. The Federal Reserve is expected to continue hiking interest rates over the near- to medium-term in order to cool inflation.
Although inflation is running hot, data indicates spending is still healthy. Monthly card spending per household excluding food, gas, and utilities appears to have rebounded in August, while household savings and checking balances by income are well above pre-pandemic levels.
Taken together, this data suggests consumers have adequate “dry powder” to weather higher prices.
Further, a slide from Best Buy’s 2022 Investor Day presentation indicates that consumer spending on technology has remained stable since 2000.