Best Buy: Stock of the Week

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Andrew Willis: From healthcare to big dividends, Best Buy (BBY) is pulling out all the stops when it comes to recovering and surviving in a tough macroeconomic environment.

Electronics are not at the top of the shopping list these days as consumers slash unnecessary electronics from tight budgets and competition between retailers intensifies. Therefore, Best Buy is expanding its business with customers through paid programs such as Best Buy Health and Best Buy Total Tech or the Geek Squad Home membership in Canada.

Equity analyst Sean Dunlop says Best Buy Health’s offering is intriguing. This business focuses on supporting electronic devices, home installation and surveillance, with customer demand being less sensitive to price changes. Best Buy has also partnered with 5 of the 10 largest healthcare systems in the US to provide remote healthcare monitoring services.

E-retail is evolving at a dizzying pace, according to Dunlop, but Best Buy is taking reasonable steps to increase competition — and keep investors happy. We approve of the company’s repurchases and dividends, which we forecast to total approximately $3.7 billion in share repurchases and $4.4 billion in dividends through 2028. The latter should help keep that going 4.28% 12-month trailing returns we’ve seen so far.

For Morningstar, I’m Andrew Willis.

  • With digital sales volumes expected to settle at about double pre-COVID-19 levels, Best Buy should better compete for online volumes it has historically ceded to online competitors.
  • Improving route density should boost the margin profile of small-package e-commerce sales, as 35% of store “hubs” now account for 70% of ship-from-store volume.
  • Totaltech’s paid loyalty program was designed to increase touchpoints with the company’s best customers and increase spending and frequency compared to pre-program behavior.
  • Service and accessory connect rates continue to be higher in in-store channels, presenting a slight headwind as the digital mix remains consistently higher.
  • Vendor concentration could result in lower wholesale discounts, lower vendor allowances, or poorer product availability over time, particularly if the direct sales channel for key suppliers continues to grow.
  • The U.S. retail industry remains overdeveloped, with the consumer electronics category seeing a low-single-digit annual average decline in square footage — and an overall decline in offline sales.

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