Bell Canada Partnership And New Store Formats Will Strengthen International Presence

Key Takeaways

• Expansion and new store formats in collaboration with Bell Canada are expected to enhance international revenue and optimize capital expenditures.
  
• Strategic promotions and service improvements boost customer engagement, potentially increasing near-term revenue and supporting stable profitability.
  
• Revenue uncertainties and declining comparable sales amid volatile demand and complex supply chain dependencies may pressure Best Buy's profit margins and future earnings.

Catalysts

Engages in the retail of technology products in the United States, Canada, and international.

• Expansion of the Best Buy Express locations in partnership with Bell Canada is expected to leverage scale and drive incremental profitable revenue, contributing positively to international revenue and potentially boosting overall profitability.
  
• The rollout of new store formats and the introduction of smaller store models tailored to specific market needs could optimize capital expenditures and improve sales per square foot, positively impacting future revenue and earnings.
  
• Strategic promotional activities, like early Black Friday sales and exclusive member offers, are aimed at stimulating demand and enhancing customer engagement during key shopping periods, which could boost revenue in the near term.
  
• Improvements in service offerings, including membership and warranty services, have driven gross profit rate expansion, which, despite slowing growth, are likely to continue benefiting margins and support stable profitability into the next fiscal year.
  
• The planned launch of a differentiated marketplace platform in the U.S. to expand product assortment and provide new revenue streams signifies a potential increase in digital sales, supporting revenue growth and earnings diversification over the long term.

Best Buy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Best Buy's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 3.4% in 3 years time.
• Analysts expect earnings to reach $1.5 billion (and earnings per share of $7.37) by about December 2027, up from $1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.4x on those 2027 earnings, up from 14.7x today. This future PE is about the same as the current PE for the US Specialty Retail industry at 16.4x.
• Analysts expect the number of shares outstanding to decline by 2.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

Best Buy Future Earnings Per Share Growth

Risks

• Best Buy reported softer-than-expected sales in the third quarter and adjusted their Q4 sales outlook to reflect potential declines, suggesting revenue uncertainties amid volatile consumer demand.
  
• The significant promotional environment and consumer focus on deals may pressure profit margins, impacting net margins negatively if the company can't balance sales incentives with profitability.
  
• Comparable sales declined by 2.5% in Q3, which was steeper than expected, raising concerns about consumer spending patterns impacting future earnings.
  
• Continued declines in major categories such as appliances, home theater, and gaming might suggest challenges in diversifying revenue streams, potentially affecting overall revenue growth.
  
• Tariffs and complex international supply chain dependencies, especially reliance on China, present a risk of increased costs for Best Buy, potentially impacting net margins and earnings if costs cannot be mitigated effectively.

Valuation

• The analysts have a consensus price target of $98.5 for Best Buy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $117.0, and the most bearish reporting a price target of just $80.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $43.8 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 7.2%.
• Given the current share price of $87.48, the analyst's price target of $98.5 is 11.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.