Streetwise for Sunday, July 15, 2018
Today’s discussion revolves around Best Buy www.BestBuy.com (BBY), the go-to-place for personal electronics. Hey, what about Amazon? Not if you want a defective item replaced on the spot. In the case of a large television, you may also want it mounted on a wall and if necessary serviced in your home. Best Buy’s Geek Squad fills the bill.
When I last wrote about the company a year ago, my earnings estimate for the 2018 fiscal year ended February 3, was $3.85 per share with a 12-month projected share price of $62, for a 10 percent capital gain. So how did the company do? Fiscal 2018 earnings came in at $4.42 per share, and the shares recently closed at $74.28.
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 showrooming, (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. Many of us believed otherwise.
When Hubert Joly was appointed to head up Best Buy in 2012, Wall Street’s naysayers complained about his lack of retail experience and sent Best Buy’s shares down 10 percent. Some on Wall Street referred to him as the Rodney Dangerfield of retail because, “He got no respect.”
Joly took aim at showrooming by matching prices, particularly those of Amazon. Nonetheless, Wall Street was confident that their initial lack of confidence in Joly would play out correctly. How wrong they were.
Best Buy has more than held its own in one of retail’s toughest markets, one that has claimed smaller rivals such as Circuit City and HHGregg. The retail giant has been profitable for five-straight fiscal years and it has managed to keep sales little changed over the last five years.
However, it seems there will never be an end to the concerns that like the dinosaurs, extinction will come to Best Buy due to a world of encroaching e-commerce.
Best Buy is reacting to the e-commerce threat and it is doing it well. In addition to a partnership with Amazon, Best Buy is becoming increasingly focused on services, which can further offset the negative effects of growing e-commerce competition.
The company has some interesting services initiatives focused on expanding sales. The most interesting is the Total Tech Support program, recently rolled out nationwide after a pilot program that involved more than 200,000 customers in 200 stores.
For $199 per year, members of the Total Tech support program get unlimited Geek Squad support online via chat, in-store and with the Best Buy home app. It applies to all the tech products they have regardless of where they were purchased.
Moreover, members receive free internet security software and discounts on in-home services and purchases of annual Geek Squad protection and Apple Care service plans.
Meanwhile, the Geek Squad will install or repair without regard to where an item was purchased. And Geek Squad services are available at more than 1,000 Best Buy locations. Like Amazon’s Prime program, the Geek Squad success took Wall Street by surprise.
Best Buy began its fiscal 2019 year on an upbeat note, with both revenues and earnings growing year over year. The company posted first-quarter adjusted earnings per share of 82 cents, an improvement of 36.7 percent year over year.
Revenues for the quarter increased nearly 6.8 percent year over year to $9.109 billion and exceeded Street’s consensus of $8.785 billion. Comparable-store sales (stores open more than a year) were up 7.1 percent compared with 1.6 percent in the prior-year quarter. Home theater, computing and tablet categories were the largest revenue drivers.
Adjusted operating profit came in at $302 million, up 0.7 percent year over year. However, adjusted operating margin did contract 0.02 percent to 3.3 percent.
The intrinsic value of the shares using a free cash flow to the firm model is $91.04. My earnings estimate for this fiscal year is $5.10 per share with a 12-month projected share price of $81, for a 10 percent capital gain. There is also a 2.39 percent dividend.
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.RuddInternational.com.