Best Buy Co. Inc. "Let’s Chat on the Good Print Takeaways - Moving to Neutral"

Research evidence excerpt

Best Buy Co. Inc. "Let’s Chat on the Good Print Takeaways - Moving to Neutral"

that BBY shares offer a balanced risk-reward skew. So, we recommend a Neutral rating on

BBY. On one hand, we believe BBY has done a commendable job of navigating a tough period for the

industry over the last few years. Eventually, a category recovery, new product innovation, and pickup

in housing turnover should drive better top-line performance. But, this doesn’t seem to be all coming

together in the next few quarters. Plus, it has a new CEO approaching the helm later this year, which

could be an overhang in the near-term. On the other side, if a recovery is farther out and BBY's top-

line remains pressured for longer, we believe its current valuation, healthy balance sheet, and

dividend yield offer solid downside support from here.

EVIDENCE Our category analysis suggests sales in 40-45% of BBY's business is directly correlated to housing

turnover, and should improve as consumer housing mobility improves from a low base. This should

drive better sales in categories like appliances, home theater, and smart home. Our analysis on

industry unit and pricing trends on an aggregate and per household basis indicates the industry is

edging up on a natural replacement cycle for key categories where Best Buy is market share leader.

Lastly, our analysis of BBY's employee costs and recent restructuring actions provide evidence that

incremental margins should be higher now than in the past – but still requires an improving sales

backdrop that we have less visibility to today.

WHAT´S PRICED IN? A reverse DCF suggests the market is pricing in flattish top-line growth over the next several years

(0% to 0.5% comp growth) and stable margins (~4.3% OM). This is reasonable. Also, BBY’s 5-yr P/E