BBY - Best Buy

[Myth465]

Was about to post that there is nothing cheap out there, but then I scanned the 52 week lows and found Best Buy. I remember them tanking awhile ago. What am I missing it just seems cheap.

 

Decent cash flow, low PE, no net debt. The only downside would be the competition issue with Amazon / Wal-Mart. Aside from that long term potential issue what am I missing.

 

Why shouldnt I buy 2 year leaps on this one. I tend to hate retail / consumer stocks but this one just looks cheap. Whats the short thesis here, is it really just an earnings miss. I may have to dig in a bit more.

 

http://seekingalpha.com/article/214752-time-to-buy-best-buy

 

 

[collegeinvestor]

Just a thought nothing quantitative but no one really needs to use best buy anymore. No new video game consuls are out. No one really uses TV's that much as people use computers. Technology just isn't as exciting as it used to be. Apple is stealing their market share in most categories. Now you can watch dvd's on netflix and no one needs to buy dvds anymore. As all these technologies (consumer goods) become lower and lower in price and technology becomes commoditized will best buy's high cost of operating result in them not being able to be in business anymore? If you have lower and lower prices you have to make the volume up somehow to handle the costs of retail. Their stores are ridiculously large for what is actually in them. So in essence how do you feel best buy will be doing 10 years from now? Technology is constantly changing and getting cheaper while Best Buy is stuck. Best buy= blockbuster?

[eclecticvalue]

The store that is close to my house always seems empty. I know a guy who works there and he says the customers that usually walk in are not tech savvy and are from the middle of nowhere. Also I needed to buy a 6ft Ethernet cable and it costs $18. You can go to amazon and get it for around $3. I would say this is a value trap stock. Now I think what they could do is open up smaller stores like radioshack (or buy radioshack out).

[onyx1]

You may get the same reaction when you look at the financials of RadioShack (RSH).  Their margins have been historically much more robust and they are currently earning 16% FCF/EV, despite the fact that the business has been consistently profitable for decades.  With BBY moving to a smaller store footprint (called Best Buy Mobile) and spending CapEx to open 150 smaller stores this year, many have suggested that BBY should simply buy RSH (RSH's EV is 12% of BBY) and get the immediate benefit of RSH's network of 7500 stores and kiosks.  However, rumors of a RSH bouyout have been ongoing for years.  See more information in the RSH thread.

 

 

[Guest Bronco]

I agree - they are overpriced and the internet is probably killing them.  I needed a HDMI cable and paid $3 on amazon or ebay (I forget which) and another 3 for shipping.  Better than the $20 or more they wanted at best buy.

 

This is anecdotal and meaningless, but another poster mentioned tv sales are slow, DVD sales are most likely dead, no one wants a computer anymore unless you use word, excel, or something requiring some power. 

 

I think the company is cheap and maybe in a better economy with new technology, this will do well.  I'm keeping my eye on it but not doing anything now.

 

 

[Ross812]

Best Buy's business model is flawed. They sell big ticket items (tvs, blue ray players, and phones) at low margins; and make up for the margin by selling accessories for a rediculous price. I was there on black Friday and watched a team of best buy associates push $60 hdmi cables (which can be bought for $3 on monoprice.com) on everyone in line that could possibly use one. They appeal to instant gratification and uneducated consumers. I think the more technology savy generation will continue the trend towards online shopping. Best buy may have a few good years left but I can't see their present business model working in the future.

 

[S2S]

I've looked at BBY at various times over the last few years; the story kept getting worse... and so did the stock price. A few (not all) points to be mindful of:

• Media sales (music CDs, movies, software) used to be 40something percent of revenue and occupy the central aisles in every BBY box. And one day, it went like that... poof... say hi to iTunes, amazon.com, bittorrent et al. Gamestop (GME) is another very cheap retail stock where the shift to digital distribution has been a game stopper (excuse the pun).
  
• So what about big ticket items, you ask? BBY used to be and, to an extent, still is the one-stop shop for consumer electronics and computers, which means they are still the incumbent (read: share giver) in most categories. Here the barbarians come in multiple fronts: Apple stores are making a killing on BBY's bread-and-butter high end, high margin segment, the mass discounters (WalMart, Target) all revamped their a-store-in-a-store electronics offerings over the last 2 years, and then there's Amazon.com, the inherent low cost, no sales tax player. Aiding these margin pressures is shoppers' increasing awareness of price comparison tools (RedLaser or ShopSavvy apps for smartphones as well as various websites).
  
• All the aforementioned headwinds aside, as the incumbent arms dealer, BBY would still make money if people were still attracted to the "guns". They aren't; product cycles anywhere (except tablets, which happens to cannibalize higher-margin laptop sales) in consumer electronics have been stale for a couple of years now. 3D TVs, anyone?
  

 

Yes, BBY is cheap. It might even be cheap enough for me to invest in at some point (when does value become a catalyst in and of itself?)

 

[Myth465]

You guys are good. I will definitely have to think about this one. All points raised are very valid. I thought the threat from Amazon was overplayed regarding LCDs and Computers but you are right BBY makes money from Media and Accessories both of which are under attack.

[Mikenhe]

One of my kids works there and I was talking to her recently after I’d made a visit.

I was researching a few items and checking prices and products in best buy (hey I’m a tactile kinda guy – I want to see the product for myself before I commit to buying it!). I was actually looking for an oven and didn’t like the selection there so ended up buying at Sears.

Anyway – the store and parking lot was mobbed. Loads of people there. I asked her how come that in a recession the store was so busy. She told me they have two types of customers (she sells computers and was commenting on that section). A) the clueless. They are going to buy a computer and want a deal so they can get a laptop for the kid as well. They aren’t going to order online because its there and they have the money (or credit) on them. B) People how look and ask questions and then go and get a better deal online (like me!).

 

They try to sell the extended  warranties as that’s where the margin is greater.

 

 

From my experience it’s a good place to check everything out. I looked at a lot of TV’s before I bought one a couple of years ago. Best Buy was the best place to actually see the main brands side by side and ask questions.

 

 

The other piece of Best buy that I can see making money is the Geek Squad, but that doesn’t need a big store to run from. I know they have some standalone stores but buying Radioshack and using them as a front end retailer for Geek squad services would give them a lot of profile and customers who aren’t going to fix their own PC’s etc.

 

I’ve followed the price of best buy for a while and was hoping to see a bigger improvement in the numbers after Circuit city went under but I guess the slack has been taken up online. Still looks like it might be a buy soon but I’ll not be putting a big chunk of money into it. Certainly its not a buy and hold for me!

 

[Myth465]

In one of the articles I was reading it said that Best Buy is the display center for Amazon and other online retailers. I thought that was funny.

 

I used to work at Best Buy 10 years ago and have the busiest store in the nation right down the street (it was when i worked there and I believe still is). Its always packed, to the brim. I go probably 2-3 times a year.

[stahleyp]

I used to work at best buy back in college. It was a fun place to work, but it seems to have changed.

 

From customer standpoint, I don't like the place. Prices are expensive and the service is horrible. The reps were not friendly and are overly pushy. I tried to return an item and it took something like 30 minutes!

 

I used to love best buy and would shop there often. Now, I'll rarely go there.

 

Sure, that doesn't mean it's not a great investment. Anything is giving the right price.

 

You guys should check this out. If this is how they still view their customers, no wonder they are struggling.

 

http://arstechnica.com/old/content/2004/11/4382.ars

 

They can certainly turn things around. MCD looked like it was going to die a slow, painful death several years ago. It went on to be one of the top performing stocks large caps over the past decade.

[turar]

I remember reading/hearing that their extended warranties are extremely profitable. I don't think they break that out in 10K though, not sure.

 

Edit:

I think this was it: http://marketplace.publicradio.org/display/web/2010/12/14/pm-are-extended-warranties-worth-it/

 

"Best Buy used to report extended warranty sales. That is, until analysts figured out that the chain made half its profits from warranties."

 

Not sure how true this is.

[prunes]

I'm of the school of thought that it is riskier to overpay than to buy a "risky" stock. Some of my other holdings include Corinthian Colleges and SuperValu. I also have way too much of my net worth invested in a biotech called Provectus Pharmaceuticals. Fortunately, I am up on these investments... it helps balance out what I'm down in BBY so far.

 

Right now I am eyeing the $30 Jan 2013 BBY calls. I'm thinking that if I can buy them for $3.50 I might make the trade. I've been eyeing them since they were at around $4.50 about a week or two ago.

 

I'm totally not chart guy but one of the things that really drew me to BBY is that if you look at its price action historically, it is a very cyclical stock. Right now it is trading below its 2-year low. Obviously you cannot rely entirely on the past to predict the future but things like this move in cycles. The worst performing stocks in one year tend to the best performing stocks in subsequent years. Plus, the most important thing to me is to buy in cheaply.

 

Less than a year ago, BBY was trading at nearly $50 and with a P/E of, I'm not going to bother to look this up, but probably low teens. BBY's business model hasn't materially changed since then. AMZN, et al, were just as serious competitors back then. BBY still churns out pretty much as cash as it did back then. Cycles are what drives this.

 

The other piece of upside I like is that right now, BBY puts out a lot of cash, but it does with a large amount of unnecessary overhead. Namely, functionally obsolete stores. As BBY's leases roll over, BBY will be able to trim leasing costs with minimal effect on revenues. I don't see anyone talk about that.

 

I could go on but this is getting a little long. Is this all extensive rationalization for being down 16%? Maybe, but I'm still confident in the situation.

[Myth465]

Here is another long thesis. http://seekingalpha.com/article/261922-best-buy-s-death-is-greatly-exaggerated

[Uccmal]

Keep in mind my location.  I am in Toronto.  Best Buy owns the market here via BB stores and Future Shop.  The stores are busy, not Walmart busy, but busy enough.  In the past two years my family has bought: 1 video camera, 1 camera, 1 Mac, 1 HP computer.  I am sure I could order some of this stuff cheaper online but I am not a tech user, not an afficionado.  I probably represent the majority.  We also bought a built in microwave.  Looked at Fridges, ranges, washers and dryers but went to Sears - they are all the same price - Sears knew what they were doing. 

 

I decline the warranties on anything from Best Buy/future shop since the refesh cycle is faster than the warrantly expiry.  But I am guessing that most people are intimidated enough to buy the Warranty. 

[calonego]

Al - What blasphemy!

 

Was The Brick not good enough???

[Guest Bronco]

I was looking at the financials and it appears for the period ended 3/1/08, BBY bought back $3.0B worth of stock.  What a bargain!  Anyone know the average purchase price?

 

I am sure it doesn't matter because you could have adopted a synthetic dividend strategy.  So it was a great deal after all!!!

 

Maybe BBY can hire Eddie Lampert and turn this into a real estate play.

 

 

 

 

[S2S]

Maybe BBY can hire Eddie Lampert and turn this into a real estate play.

 

That's what exactly the stock needs, an activist investor in the mold of Ackman. Judging from Radioshack's lack of success so far in finding a suitor, big buyout firms aren't exactly lusting after electronics retailers.

[Guest Bronco]

Perhaps BBY is not in secular decline (maybe it is) but a factor has to be that TV sets and computers do not need replacement as often.  A good LCD or plasma should last you 10 years.  A good computer can last you 5 years, assuming you don't have an Ipad, in which case you will forget where your computer is located.

 

Apple is making a fortune b/c people replace their products every year or so.  This is great economics but surely won't last forever.

 

 

[Uccmal]

Jordan,  The Brick scares me!  Leons scares me, especially when the saleperson demonstrates the fabric guard.... I dont do well with aggressive sales staff - I have been known to be not so nice.  Bad Boy terrifies me!  BB/future Shop is lower key. 

 

Anyway, its FFH's investment, not mine. 

 

Bronco, there is the latest and greatest gadgeteers though.  We still have my old colour TV - 12 years - with a real picture tube in it.  Works fine. 

 

The gadget business definitely operates in a cycle.  Its hard to predict what the next big seller will be.  Flat screens have been real lucrative. 

[Kraven]

This is an interesting discussion.  To me, it's the exact same discussion revolving around BKS and any other physical bookseller.  BBY, RSH, BKS, etc., it's all the same thing.  The question is simply will the future look anything like the past.  If so, these are all bargains.  If not, if the Amazons and Wal-Marts, etc etc are going to eat their lunch and send them all into bankruptcy a la Circuit City, Borders, etc., then they are done. 

 

There are those who only order products now over the internet.  They get the cheapest price possible and don't care where it comes from (relatively speaking).  Others want to go into the store and look at the books, play with the tv or phone, whatever and then buy it there.  Some look and then buy over the internet.  Depending on what it is though, it would seem to me that there are certain products that people want to buy from a store.  If I buy a new plasma tv I want to know that if it's broken I can return it to the store.  What a hassle to have to pack it back up and send it back.  Then you have to insure it or make sure the seller insures it.  If it's a book, might be a different question.

 

So it seems to me that while the internet and other discount retailers will impact BBY's sales, assuming they can make rational decisions that there is a place for them in this world.  Same with the booksellers.  Not everyone wants to delay their purchase.  Just some thoughts.

[Kraven]

A further thought.  To some extent isn't this the exact same argument that people were having in the late 90s?  Weren't all bricks and mortar retailers (among everything else) going to disappear?  Etoys had a much larger market cap than Toys R Us.  Of course kids like to look around and play with things first.  Same here.  Some people want the experience of walking into a store.  Not everyone of course, but enough people I would assume.  Doesn't mean any of these retailers need to survive, but there is a place for someone.

[turar]

Keep in mind my location.  I am in Toronto. 

 

Canada is actually a lot worse than the US in terms of online shopping, having lived both places. Amazon was finally allowed into Canada last year, so they're making more inroads, but it's still a big difference.

 

Incidentally, BBY also sells online just as well, with an additional option for instore pickup. Last laptop that I bought was from Best Buy, online only, delivered to home.

[Uccmal]

Really good points Kraven, and Turar.  In the 90s we were going to be buying cars online.  I dont see that or a whole host of other things ever happening now.  The last ten years have been instructive in showing how customers will likely behave.  Apple & Sony opened B&M stores. 

 

On Winter weekends the lineups at my local chapters are 70feet long and last for hours. 

 

As for BBY, online or not it is not cheap enough for me yet.  It lacks the margin of safety to jusify a 50%-60% maximum upside.

[Guest Bronco]

Uccmal - couple of examples of stocks meeting your margin of safety for 60% upside.