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Can Best Buy Rely on Growth Strategies to Boost Its Valuations?

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Current valuation

As of May 18, 2015, Best Buy (BBY) was trading at a forward PE (price-to-earnings) multiple of 13.6x, down 7.3% compared to the beginning of 2015 and down 11.5% since the announcement of the company’s 4Q15 results on March 3.

Rivals GameStop (GME) and Aaron’s (AAN) were trading at forward PE multiples of 9.9x and 15.8x, respectively, as of May 18. Target (TGT) was trading at a forward PE of 16.7x on the same day. Target derived ~18% of its fiscal 2014 revenues from the “hardlines” category, which includes consumer electronics.

Best Buy valuations are lower than those of the S&P 500 Consumer Discretionary Index and the S&P 500 Index. Best Buy’s stock price has declined by 9.5% to $35.09 since the beginning of 2015.

Best Buy is one of the few pure-pay electronic retailers that has managed to withstand weak industry demand and intense competition from online retailers. The company’s key rival RadioShack filed for bankruptcy earlier this year, while Circuit City closed down in 2009.

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Growth strategies

Best Buy plans to enhance the consumer shopping experience by expanding product selection both in stores and online. To capture the demand for high definition TVs, the company plans to open ~20 additional Magnolia Design Center stores-within-a-store in fiscal 2016. The company also plans to open ~60 additional Pacific Kitchen & Home stores-within-a-store.

Best Buy is also focusing on the expansion of its connected home and health and wearables businesses. According to projections provided by the CEA (Consumer Electronics Association) in January 2015, overall wearable unit sales are expected to come in at 30.9 million units, up 61.0% from 2014. Wearables are expected to generate $5.1 billion in revenue in 2015, up 133% from last year. Included under the wearables category are fitness activity bands and other health and fitness devices, smartwatches, and smart eyewear.

The company will continue to drive cost efficiencies with technological enhancements, such as replacing warehouse technology systems. It also plans to invest in improving its home delivery and installation services.

Best Buy makes up ~0.4% of the Consumer Discretionary Select Sector SPDR Fund (XLY) and 0.1% of the SPDR S&P 500 ETF (SPY).

For more updates, visit our Consumer and Retail page.

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