ShahKhezri Posted January 7, 2012 Share Posted January 7, 2012 with the additional cost cuts and earnings a private equity firm could potentially wring out, Best Buy may command at least $37 a share in a buyout, or $13 billion, according to Di Zhou, a Santa Fe, New Mexico-based analyst at Thornburg, which oversees $70 billion in assets and owned Best Buy stock at the end of September. Zhou based her estimate on analysts’ average earnings projections (BBY) and a multiple of 10 times. Good luck to all longs, seems like there is an argument to be made on the long side, I'm not rooting against you as I don't have a short on BBY. However, I think the argument that there is little to no leverage for BBY is flawed, a 5-10% decline in sales will eliminate the share repurchase, putting leases back on B/S going forward is going to make book leverage and operating leverage evident. But I'm bias, I promised myself not to invest in businesses that are in secular decline and an electronics retailer is in that box (and I don't want AMZN as a competitor). How much of that past revenue number was a result of 0% 12-month financing? A 50 inch TV used to cost $4,000, now you can get a nice one for under $600 and 3D TV's have been a flop. A customer was willing to buy warranty on a computer that cost $2,000-3,000...is that same customer willing to purchase warranty on that same computer that now costs $500-600? Can the company turnaround? Sure, but look at what they are telling you, Best Buy Mobile, trying to compete against Gamestop...these are saturated markets. These are business questions, not valuation questions and personally I have to feel comfortable with the business and where it's headed before the valuation becomes tempting to me. I understand the shot-gun approach to cigar butts but this is not a cigar butt. Ackmans presentation on Lowes was on valuation (historical and relative), they owned their own real estate, strong share repurchase and the fact that online represents little danger to this type of retailer. Here we have a company that has a cheap valuation, strong repurchases with off balance sheet liabilities and online competition. Based on the link above, (http://www.bbycommunications.com/briandunn/?p=1439&t=dbrief#comments) The comments from past employees is entertaining. Link to comment Share on other sites More sharing options...
Arden Posted January 7, 2012 Share Posted January 7, 2012 uccmal, what is the normal free cash flow in your opinion? I can see an argument for saying it's maybe 600-700, how do you see it? Link to comment Share on other sites More sharing options...
Uccmal Posted January 8, 2012 Share Posted January 8, 2012 I actually posted a free cash flow workup in this thread around page 7. I was kidding about the your wrong remark BTW. :-X Conservatively, I would go with 500 m per year. FCF of that magnitude is pretty desirable, should it be sustainable. If the model moves progressively more online fixed costs will come down, or at least not rise. Management has moved Expansion efforts to the mini store format. As I have stated before in this thread I only need a reversion to the mean, say the 37|sh the private equity group has estimated... posted above by Burke. Link to comment Share on other sites More sharing options...
Guest Hester Posted January 8, 2012 Share Posted January 8, 2012 I think the biggest short term risk to the short thesis (of which I subscribe to) is if management really takes the types of comments in the blog post linked above seriously. It is bad enough BBY's business is in secular decline but their salesmen are really pissing people off. It is making the transation for many from shopping in Bricks and Mortar to online faster. A restructuring of the sales force could provide some good short term results, and maybe even sucker in an acquirer. Link to comment Share on other sites More sharing options...
Arden Posted January 8, 2012 Share Posted January 8, 2012 Hey uccmanl, now I'm completely confused, I saw the excel sheet you uploaded: http://www.cornerofberkshireandfairfax.ca/forum/index.php?action=dlattach;topic=4157.0;attach=662 But I think the guy who made it made a mistake- He takes the changes in working capital, adds them back to cash flow from operating activities and then subtracts the changes in WC from the result before reaching a FCF of 500. Any idea why he does that? IMO he should have just added the WC , and then you get a much much better FCF Link to comment Share on other sites More sharing options...
Uccmal Posted January 8, 2012 Share Posted January 8, 2012 Shlomiardan, I will have a look later. The author of the spreadsheet wrote a book that I have. I have used it for a few companies when I want to confirm their numbers. thanks. Link to comment Share on other sites More sharing options...
Uccmal Posted January 9, 2012 Share Posted January 9, 2012 Everything looks okay. Start with Gaap cash flow. In this case changes in working capital were (1363). This means that cash was released from working capital requirements. So, the spreadsheet multiplies it by (1) and adds it to gaap cash flow to get the Operating cash flow number. That number 2553 is taken down to determine Cash operating Costs so it can be looked at in the ratios further on. Then you subtract the working capital back off and also the capex to get FCF. The reason for adding it in and then removing it is to set up the spreadsheet to look at each section in isolation and compare trends over time further on. It could be simplified by just removing capex from Net CFO, which is down and dirty way I often use to see if there is any FCF at all or any trend. This method was designed by the books author to break out each piece of the equation. Not correcting for WC can massively skew results one way or another. Dell is an example of this where the accounts payable are double the AR. People mistakenly overestimate Dells Cash flow and balance sheet cash. This is okay so long as dell can continue to bring in rec. ahead of payables, but as they move to a service structure with billing occurring after payroll things may change. FYI: the book is called : Free Cash Flow by George Christy - wiley Blank spreadsheets and one sample are available at www.wiley.com/go/christy Link to comment Share on other sites More sharing options...
Arden Posted January 9, 2012 Share Posted January 9, 2012 Thanks uccmal! few questions though: "In this case changes in working capital were (1363). This means that cash was released from working capital requirements" doesn't a negative "changes in working capital" account mean that cash was added to working capital, and not released? It looks like a cash expense. "It could be simplified by just removing capex from Net CFO, which is down and dirty way I often use to see if there is any FCF at all or any trend." This is the method I know, and I think it's the one buffett uses, and as you say- it makes a lot of difference. How do you know in which cases you add back the WC and in which you don't? Link to comment Share on other sites More sharing options...
Uccmal Posted January 9, 2012 Share Posted January 9, 2012 in this case accounts receivable dropped by 371 from the prior year, inventories shrank by 400 m from prior year, AP dropped by 443 m.... summing to a total reduction in WC of 1363. that means less cash was required to operate at year end than at year start. We may just be talking past one another. Another example would be company X which uses cash to ramp up its inventory. The change in inventories might be an increase of 100 m, which shows as an increase in working capital. 100 m cash is spent to increase WC. Link to comment Share on other sites More sharing options...
tooskinneejs Posted January 9, 2012 Share Posted January 9, 2012 CNBC is going to run an hour long look at Best Buy on January 19th at 9pm. Some of you might be interested... http://www.cnbc.com/id/45553154 Link to comment Share on other sites More sharing options...
Guest Hester Posted January 19, 2012 Share Posted January 19, 2012 Just a bump/reminder: CNBC special on Best Buy is airing tonight at 9 Eastern. http://www.cnbc.com/id/45553154/ Link to comment Share on other sites More sharing options...
Arden Posted February 7, 2012 Share Posted February 7, 2012 Does anyone know of a way to watch the CNBC special online? missed it.. Link to comment Share on other sites More sharing options...
Uccmal Posted February 8, 2012 Share Posted February 8, 2012 I am finding this more than a little ironic: http://timesofindia.indiatimes.com/tech/news/internet/Amazon-planning-physical-retail-store-Report/articleshow/11808594.cms Amazon B&m stores? Link to comment Share on other sites More sharing options...
mikazo Posted March 30, 2012 Share Posted March 30, 2012 I've been considering this stock for the past few days and waiting to see the Q4 results released today. Apparently Best Buy took a non-cash minority interest expense of $1,319m in Q4 from buying the remaining ownership in a profit-sharing interest from Carphone Warehouse of Best Buy Mobile. Besy Buy stock down almost 7% today, seems like the market isn't digging a little deeper into the quarterly report. With all that said, there are 50 store closures and many restructuring costs in the works, and declining operating income. Here is a comment I posted on Seeking Alpha regarding Best Buy and why I'm still bullish on it: "I don't know why everyone places so much emphasis on online retail. I agree that it has a place in the economy, I order books from Amazon and HDMI cables from monoprice.com. But typically, if I know I can go and buy something locally, I go and do it. That way, I have the product instantly, rather than having to wait days or weeks. If I want to return a product, I also don't have to wait days or weeks. Plus, I don't have to pay shipping! I'm a very technical person and don't expect Best Buy employees to know as much as I might want to know about a product. If I want to know more, I search the internet. But for non-technical people, they don't need all the technical definitions. I used to work at Staples, and I've also had friends and family ask me for help when buying a computer. I ask them details about what they're looking for, and then when I start to explain the specs of what might best suit them, they usually don't care. They essentially want me to pick a product for them, and they will buy it. I think there will always be a significant portion of consumers that want instant gratification for their purchase and/or returned products, rather than deal with shipping costs. Especially with large items like TVs and appliances." Thoughts? Link to comment Share on other sites More sharing options...
beerbaron Posted March 30, 2012 Share Posted March 30, 2012 Here is a comment I posted on Seeking Alpha regarding Best Buy and why I'm still bullish on it: "I don't know why everyone places so much emphasis on online retail. I agree that it has a place in the economy, I order books from Amazon and HDMI cables from monoprice.com. But typically, if I know I can go and buy something locally, I go and do it. That way, I have the product instantly, rather than having to wait days or weeks. If I want to return a product, I also don't have to wait days or weeks. Plus, I don't have to pay shipping! I'm a very technical person and don't expect Best Buy employees to know as much as I might want to know about a product. If I want to know more, I search the internet. But for non-technical people, they don't need all the technical definitions. I used to work at Staples, and I've also had friends and family ask me for help when buying a computer. I ask them details about what they're looking for, and then when I start to explain the specs of what might best suit them, they usually don't care. They essentially want me to pick a product for them, and they will buy it. I think there will always be a significant portion of consumers that want instant gratification for their purchase and/or returned products, rather than deal with shipping costs. Especially with large items like TVs and appliances." Thoughts? Well, your in good company since your thesis is very similar to Einhorn's. His theory is that the market does not value having a nearby store to test and return your products as much as it should. I kinda agree, but it's not cheap enough yet. 8 time FCF is my price. On the other hand their margins have been shrinking and Amazon's model should continue to erode them. They seem to be doing half of a good job with their online retail but not good enough yet. BeerBaron Link to comment Share on other sites More sharing options...
Viking Posted March 30, 2012 Share Posted March 30, 2012 mikazo, I agree. There are a bunch of companies in different industries that have been hammered by investors over the past few years. Their business is being severely disrupted. I do think Best Buy has a place in the future; what I can't predict is how much of its business migrates to the internet and what the economics of its remaining business looks like. Domtar looks like a great example of a well run company that is prospering despite being a large manufacturer in a commodity and declining business (paper). Resolute (ABT) is trying to do the same in newsprint. I have been following the Canadian newspaper companies for a few years: Glacier Media & Torstar Printers looks interesting: Transcontinental (Can) & Quad Graphics (US) Safeway looks very interesting. I am reading lots and perhaps during the next stock market sell off I will make a few purchases (likely those with low to reasonable leverage and strong management teams). Link to comment Share on other sites More sharing options...
Guest Hester Posted March 30, 2012 Share Posted March 30, 2012 I've been considering this stock for the past few days and waiting to see the Q4 results released today. Apparently Best Buy took a non-cash minority interest expense of $1,319m in Q4 from buying the remaining ownership in a profit-sharing interest from Carphone Warehouse of Best Buy Mobile. Besy Buy stock down almost 7% today, seems like the market isn't digging a little deeper into the quarterly report. With all that said, there are 50 store closures and many restructuring costs in the works, and declining operating income. Here is a comment I posted on Seeking Alpha regarding Best Buy and why I'm still bullish on it: "I don't know why everyone places so much emphasis on online retail. I agree that it has a place in the economy, I order books from Amazon and HDMI cables from monoprice.com. But typically, if I know I can go and buy something locally, I go and do it. That way, I have the product instantly, rather than having to wait days or weeks. If I want to return a product, I also don't have to wait days or weeks. Plus, I don't have to pay shipping! I'm a very technical person and don't expect Best Buy employees to know as much as I might want to know about a product. If I want to know more, I search the internet. But for non-technical people, they don't need all the technical definitions. I used to work at Staples, and I've also had friends and family ask me for help when buying a computer. I ask them details about what they're looking for, and then when I start to explain the specs of what might best suit them, they usually don't care. They essentially want me to pick a product for them, and they will buy it. I think there will always be a significant portion of consumers that want instant gratification for their purchase and/or returned products, rather than deal with shipping costs. Especially with large items like TVs and appliances." Thoughts? First of all, extrapolating your personal shopping experience to an investment thesis about the future of a company with $50 billion in sales is about the worst thing you can do. BBY's physical stores do provide value in showroom/test and easier returns. The only problem is, are they profiting off this , and will this value produce enough revenue to make a profit given BBY's high fixed costs and lease expenses? (their leverage is quite high, despite what most people think. They own less than 2% of their retail stores) BBY makes no profit when a customer goes into their store, tests the product they are interested in, and then checks the price on their phone and decides to wait 3 days to get it so they can save $50. The easier returns theory doesn't fit with the data, because there are more customer complaints with the BBB per $1 million of sales compared to Amazon and Wal Mart. The data shows people often prefer to deal with Amazon's return policy even given the shipping required. Keep in mind as well, that all the advantages that BBY potentially has over online retail, Wal Mart has too. It is no surprise that BBY is also losing share to Wal Mart. Link to comment Share on other sites More sharing options...
rkbabang Posted March 30, 2012 Share Posted March 30, 2012 If I want to return a product, I also don't have to wait days or weeks. Plus, I don't have to pay shipping! Thoughts? First of all, extrapolating your personal shopping experience to an investment thesis about the future of a company with $50 billion in sales is about the worst thing you can do. I agree, but that is exactly what I'm about to do. :) A tale of two returns. A few years back I bought a TV mounting bracket to mount a flat screen to the wall at BBY. I ended up finding one I liked more on line and bought that one instead. I put the one from BBY in my trunk with the receipt and it sat there for a month before I got to the store to return it. And guess what? "Sorry it's been over 30 days there is nothing we can do". The $60 item went into a box at home I keep for donations. At Amazon however. I get an item, I don't like it, or it isn't what I expected, I go to their website, tell them I wish to return it (an easy process) then they tell me UPS will pick it up the next day. If I'm not going to be home I leave it on my front steps with a post-it note on it that reads "UPS for pickup". Done. I'd rather deal with Amazon.com any day than BBY. It certainly isn't universal that everyone thinks local store = easy returns. --Eric Link to comment Share on other sites More sharing options...
oddballstocks Posted March 30, 2012 Share Posted March 30, 2012 Has anyone ever tried to return something to Best Buy? That experience alone will turn people off from ever shopping there again. So maybe I'm average but I'll share my experience because I shopped there recently. So first off I used to shop at Best Buy a lot, I'd buy CDs there, just goes to show some time frame. So I went in recently, I had purchased a TV at Costco and I needed a wall mount that was simpler than what Costco sold. I went to the Best Buy about 2 miles from my house. So first off the store was a bit confusing, they changed the layout since I was last in there. To get to the TVs (in the back of course) I walked past a row of desks where it seemed like people were getting credit checks for something, seemed a bit low brow, had the car dealer feel. So I compared prices to what I purchased at Costco, Best Buy didn't hold a candle to Costco's prices. Plus Costco will let you return anything within 90 days, Best Buy only if the product is unopened (?!?!). Anyways I found a stand, had a few people ask me if I wanted help which was nice, I got some actual advice on how high to hang a TV. I took the mount from the shelf, it was under a $59.99 sticker, got to the front it rang up $99. I told the lady, she checked the price and gave me the lower price because it was mismarked. Now at $59.99 the mount was reasonable, at $99 I could have bought a much better one at Target (in the same shopping center a few stores down) or at Costco for less. Best Buy lost money on me this time due to some sort of employee stocking error, additionally I was completely underwhelmed. My wife a completely non-tech average shopper went in there recently to buy writable DVDs she needed that day. She came back and said "I was so confused, I probably wouldn't go there again, I wasted so much time trying to find what I needed and it was expensive." Not sure if it's a sign or anything but the parking lot is more crowded for the state liquor store and the craft store which are next to Best Buy rather than Best Buy. I have no dog in this race but I think people's shopping habits are fundamentally changing. This feels similar to the shift from department stores to strip mall retailers. At the time a lot of people couldn't imagine a department store being dethroned. I don't think local retail is dead, niche retailers are doing fine/well. Big box stores with cost advantages seem to be doing alright Sams Club and Costco. Best Buy is stuck in no mans land. Link to comment Share on other sites More sharing options...
mikazo Posted March 30, 2012 Share Posted March 30, 2012 Thanks for the info and anecdotes everyone. I'm still trying to decide whether I'm bullish enough to put money where my mouth is. Link to comment Share on other sites More sharing options...
mikazo Posted March 30, 2012 Share Posted March 30, 2012 XKCD had perfect timing today for what we were just talking about :D http://xkcd.com/1036/ Link to comment Share on other sites More sharing options...
Guest Hester Posted April 10, 2012 Share Posted April 10, 2012 CEO Brian Dunn resigns. http://money.cnn.com/2012/04/10/markets/best-buy/index.htm?source=yahoo_quote Link to comment Share on other sites More sharing options...
MYDemaray Posted April 10, 2012 Share Posted April 10, 2012 I suggest you draw a picture of their "box" floor plan on a piece of paper. Divide it into all their different business lines as they are laid out in your local store, assigning the corresponding space to how much physical space is taken up by each: appliances, stereos, dvd's and cd's, video games, computers, television & home theater. Then think about each of those businesses separately: What does it look like in 5 years? Where does BBY fit in the competitive landscape? How many competitors do they have, who are they and what is the basis for competition? Then use the same box, and think about how space that business will take up 5 years from now. Then, think about how in the world they are going to downsize that big box? What are the costs, the negative operating leverage, etc. Most on this thread have already gotten there, but when I step through that mentally I see a box that needs to shrink but there are large associated costs with doing so.... Link to comment Share on other sites More sharing options...
Guest Hester Posted April 10, 2012 Share Posted April 10, 2012 Best Buy's problem is that it is structurally extremely difficult to downsize. It is not like they can just easily slice square feet off of each store. Not too many people realize how operationally levered they are. At this point I doubt a turnaround is possible, but if it is, a new CEO is a prerequisite. So today's announcement is actually good news for the business, so long as they eventually replace management with someone capable. That's a big if. Dunn was a sales guy, and he was painfully ignorant and delusional about the difficulties BBY faces. Resigning proves he overcame that delusion and probably did the right thing. The market is slowly starting to recognize the risks. BBY continues to be my largest, and favorite short position. Link to comment Share on other sites More sharing options...
turar Posted April 10, 2012 Share Posted April 10, 2012 What are your other short positions, Hester (if you don't mind sharing, obviously)? Link to comment Share on other sites More sharing options...
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