Neutral for an average person like me.

Who are they, and what do they do?

Best Buy is the world’s largest specialty electronics retailer. As of 2023, they operate over 1,000 stores in North America and employ approximately 85,000 people.

Their stores offer a wide range of products, including computers, phones, televisions, home appliances, and various electronic accessories. They can be compared to French retailers like Boulanger or Darty, and even FNAC in many aspects.

Key figures and features:

• Online sales account for nearly 33% of their revenue.
• 60% of packages are picked up or delivered within one day.
• 45% of sales are collected in-store by customers.

Membership program: Best Buy offers a tiered paid membership program with three levels, providing benefits such as:

• Early access to sales and special offers.
• Priority customer support.
• Discounts on repairs.
• Extended return windows for purchased items.

Credit card program: Best Buy also has a store credit card that rewards customers with points, effectively acting as cashback. These points can only be redeemed within the store, encouraging further purchases and loyalty to the brand.

Considerations - Store Closures/Conversions Fixed cost reductions:

• Lowering expenses such as rent, maintenance, and large inventories helps boost operating margins.
• Freed-up resources can be reinvested in digital infrastructure, logistics, or online marketing.

Consumer trends:

• Growing demand for "Click and Collect" services and increasingly faster delivery options.

Optimizing the omnichannel model:

• Closing underperforming stores in specific areas to improve efficiency.
• Reducing store sizes while continuing to showcase key products like TVs, mobile phones, and computers.
• Smaller stores can also serve as branded pickup points, maintaining customer engagement.

Considerations and challenges:

• Some customers still prefer seeing, touching, and testing expensive products like TVs, computers, and home appliances before buying.
• The Geek Squad service remains an important factor, offering computer repairs, home cinema installation, technical support, and smart home services.
• Limitations of a fully digital approach: Warehouse needs, transportation costs, and return/exchange expenses could offset the savings from store closures.

Brand presence and perception:

• Maintaining a strong omnichannel presence helps compete with pure players like Amazon.
• Store closures, however, might be perceived as a sign of decline, potentially impacting brand image.

1. Business Understanding

Simple: Primarily sells consumer electronics. Also offers additional services like credit cards and premium membership plans.

2. Essential or Discretionary?

Discretionary: Sells non-essential products that consumers can delay purchasing by making do with their current devices.

3. Stable or Cyclical?

Cyclical: Sales depend on seasonal periods such as holidays, back-to-school, and Black Friday. Replacement cycles for key products like phones, TVs, and computers are around 3–5 years. Technological innovation also drives spikes in demand, such as the launch of new consoles or smartphones.

4. Who is the target audience? General public or niche?

General public: Customers range from kids and teenagers to parents and grandparents.

5. Global or local market?

Local: Focused on North America. The company failed to expand successfully into Europe.

6. Public perception: High-value, daily essential, or easily replaceable?

Easily replaceable: Operates in a highly competitive market. If Best Buy becomes too expensive or shuts down, customers have plenty of alternatives.

7. Product reliance: Hard to replace or easy to switch?

Easy to switch: Neither the products nor the brand are irreplaceable. Products are widely available elsewhere, and the store itself does not offer exclusives.

8. Network effect: Does more customers mean better results?

Requires more customers: Operates on thin margins, so profitability depends on high sales volumes. Prices are constrained by intense competition.

Synthesis:

It’s clear that Best Buy is unlikely to outperform the market. It doesn’t offer a significant source of passive income either, with a CAGR of just 4.64% over 20 years, 5.14% over 15 years, and 9.77% over the past 10 years (dividends included).

It struggles to compete with giants like Amazon and could quickly lose its position, given its lack of strong advantages or a defensible moat. Future prospects are neither revolutionary nor particularly encouraging, but the company has performed better in recent years than in the past. Time will tell where this leads.

Assumptions

• Net Margin on his 5Y average around 3.6%
• Future revenue Growth rate of 2%
• Discount rate of 8%

According to Simply Wall Street, it appears slightly overvalued. However, based on my DDM, DCF, and multiples valuation, it seems slightly undervalued by around 2% to 7%