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Stock Analyst Update

We Maintain Our Conservative Outlook on Best Buy

The market remains ahead of the no-moat retailer's longer-term intrinsic value.

Mentioned:

No-moat  Best Buy's (BBY) third-quarter update gave us our first look at its 2020 strategy since its September investor event, and we see few reasons to change our conservative longer-term financial assumptions. While the market appears to be reacting to isolated events, including the iPhone X launch shifting into the fourth quarter and hurricane disruptions, we're more focused on the building blocks of management's 2021 targets of $43 billion in revenue (a 2.2% CAGR from 2017-21), $1.9 billion-$2.0 billion in operating margins (4.5% operating margins), and EPS of $4.75-$5.

We believe key product cycles (smart home, TV, wearables, and gaming) and macro themes (an improving U.S. housing market driving appliance demand) will keep comps in the 3% range for at least the next two quarters before decelerating to the low single digits amid more difficult comparisons. We're also encouraged by the response to in-store smart-home departments and in-home advisor services, which should be a gradual top-line contributor. Still, with Amazon testing in-home services as part of its Kohl's partnership and with other retailers exploring similar solutions, we still have a more conservative services outlook relative to the 2021 outlook. Coupled with additional store closings in the years to come--management acknowledged that consumers are buying more small-ticket items online, thus requiring less square footage--we remain comfortable with our 2021 revenue target of $42 billion.

We're not planning material changes to our $48 fair value estimate. Fourth-quarter guidance--including revenue of $14.2 billion-$14.5 billion, domestic comps of 1%-3%, and adjusted EPS of $1.89-$1.99--gives Best Buy room for upside surprises (though potentially offset by supply chain and e-commerce investments), and an increase in planned buybacks this year ($2.0 billion from $1.5 billion) is positive for total shareholder returns. But we believe the market remains ahead of Best Buy's longer-term intrinsic value.

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R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.