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Streetwise for Sunday, July 12, 2020









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Streetwise for Sunday, July 12, 2020

Today’s discussion revolves around Best Buy (BBY), the go-to-place for personal electronics. 

When I last wrote about the company a year ago, my earnings estimate for the company’s 2020 fiscal year, which ended February 1, of this year was $5.72 per share with an estimated 12-month projected share price of $79, resulting in a 10% capital gain. There was also a 2.78% dividend yield.

So how did the company do? Fiscal 2020 earnings came in at $6.07 per share, and the shares recently traded at $86.17. 

For years, Best Buy has been perceived as a relic, the last vestige of a bygone era. Unable to defend itself against the effects of show-rooming, (customers going to brick and mortar showrooms to look with the idea of buying online for less), it was said you could almost hear the death rattle. How wrong, how wrong.

Best Buy recently announced results for its first fiscal 2021 quarter ended May 2. As Corie Barry, Best Buy CEO, pointed out, the company shifted all its stores to a curbside-only operating model in the middle of first quarter and still managed to retain approximately 81% of previous year’s sales, even though not a single customer set foot in any of its stores.

This strong sales retention was a testament to the strength of the company’s multi-channel capabilities and the strategic investments that Best Buy has been engaged with over the past several years.

There is no question that the COVID-19 pandemic changed the way in which Best Buy conducted business. However, wherever there was a stay-at-home order in place, Best Buy was designated an essential retailer because of its products and services.

Despite the challenges going forward, Best Buy is likely to remain well positioned. To that end, Best Buy has accelerated aspects of its strategy and rapidly changed the ways in which customers interact with the company.

However, because of the ongoing uncertainty related to COVID-19, Best Buy has suspended its forward-looking financial guidance effective March 21.

On May 4, the beginning of the company’s fiscal second quarter, Best Buy began welcoming customers back into its stores, although with strict social distancing practices in place and with the use of proper protective equipment.

Best Buy has nearly 700 stores, about 70%, operating in this manner. The company is also evaluating expanding store hours and opening some stores beyond the current appointment-only model.

Looking at domestic first quarter results, revenues decreased 6.7% versus a year ago, due to a comparable sales decline of 5.7% and the loss of revenue from 24 permanent store closures. 

The largest sales growth drivers were computing and gaming, offset by a decline in home theater, mobile phones, and digital imaging services.

Online revenues increased 155.4%. As a percentage of total domestic revenue, online revenue increased to 42.2%, versus 15.4% a year ago.

The company’s gross profit rate was 23.0%, versus 23.7% a year ago. The decrease being due to higher supply costs resulting from increased online revenue.

Using Generally Accepted Accounting Principles (GAAP), selling, general, and administrative expenses came in at 19.9% of revenue, versus 19.8% last year. Store payroll expenses were lower compared to last year if you include an employee retention credit of $69 million resulting from the Federal CARES ACT.

Internationally, revenues were $647 million, a decrease of 2.1%, versus a year ago, driven by the impact of negative foreign currency exchange rates. That was offset in part by revenue from new stores opened in Mexico. 

Internationally, the company’s gross profit rate was 22.3%, versus 24.2% a year ago, due to a lower mix of higher-margin services revenue and higher supply chain costs, primarily in Canada.

Best Buy’s first quarter effective tax rate was 27.4%, versus 19.8% a year ago.

The intrinsic value of the shares using a free cash flow to the firm model is $130.69. My earnings estimate for this fiscal year is $5.75 per share with a 12-month projected share price of $95, for a 10% capital gain. The current indicated annual dividend is 2.51%.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.

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