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Best Buy's core business is roughly stable [ClearOnMoney]
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Best Buy's core business is roughly stable

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Commentary

Best Buy's core business is roughly stable

8 Oct 2012 by Jim Fickett.

Most commentators seem to think that Best Buy is rapidly shrinking. This is false. The core business, on several measures, is neither growing nor shrinking significantly. Lack of growth is a big change from the earlier history of the company, and may well be a problem. However the situation is not as dire as usually painted.

Let's look at several different measures.

US market share

Most of the data on Best Buy's US market share comes from The NPD Group, a well known market research firm. The first seven lines in the table below are from the annual reports, where the data are not always attributed, but NPD is often mentioned. The 2010 and 2011 numbers in the table are directly from an April NPD blog post.

Calendar year Market share
2001 10%
2002 13%
2003 15%
2004 17%
2005 18%
2006 20%
2007 21%
2008
2009
2010 19%
2011 19%
2012 “up a little from the prior year”

(The last point is from the FY2013 Q2 earnings call)

The NPD data suggest that Best Buy's overall market share peaked about 2007 at about 21%, dropped back slightly to about 19%, and is fairly stable now.

A few data points from other sources (using different methodology, and so not directly comparable), are compatible with this view:

  • On 13 Sep 2011 Avondale asset management reported that BBY's share of retail electronics stores sales rose pretty steadily from 23% in 2002 to 38% in 2009, and then dropped back to 37% in 2010. (Note this is only store sales, but it does say BBY has done pretty well measured against other physical stores.)
  • On 12 Apr 2012 Investment bank Canaccord Genuity said, as reported by CNET, that Best Buy's market share might have declined for the first time in a decade [no numbers given].
  • On 18 Sep 2012 Qinecqt at Seeking Alpha, reported a JPMorgan estimate that Best Buy market share dropped from 25.6% in 2010 to 24% in 2011.

The same post from NPD that provided the 2010 and 2011 numbers in the table above also mentions that Best Buy's online market share is growing. This is particularly important given that the common story is one of Amazon shutting down Best Buy:

Best Buy also was the number one brick-and-mortar retailer online and gained almost one point in revenue share, now 22.4 percent, among retailers on the Web.

According to an August blog post from NPD, the difficulties of Best Buy are due to general stagnation in the consumer electronics retailing business, not Best Buy failing to compete:

You will hear once again today … the plaintive cries of ill-advised, unknowledgeable purveyors of conventional wisdom. They will tell you that Best Buy is being hurt by online sales, by aggressive pricing, and by poor decision making. Don’t buy any of what they are selling.

These are the facts, and we have been detailing them for months now. The easy, lazy story is that everyone is buying electronics online; the truth of the matter is no one is buying consumer electronics anywhere. Best Buy and other retailers have a strong online presence for electronics. Retailers’ share of Internet sales is just as large as online-only retailers’ share of sales. Take a look around, except for some specific cases (Apple branded products, components companies, Samsung smartphones) nothing is selling, no one is making money. Over the last seven quarters Apple has represented all the growth in consumer technology. Without Apple the industry is solidly negative with little momentum in the short term to change that. Best Buy remains a market leader, with sales volume nearly 50% higher than its nearest competitor. We are in a slow growth, mature, highly-saturated marketplace for technology in the U.S. And that is the fundamental problem Best Buy (and just about everyone else) is facing. We certainly wish Mr. Joly success, the industry needs strong leadership from Best Buy and innovative thinking around services, value-adds, and the in-store experience. But without solving the fundamental stagnation in the technology business it will be an uphill battle for everyone in this business to be successful.

Same-store sales

Here are the data that have everyone scared:

I admit, its not pretty. But there are mitigating circumstances:

  • Some of this is cyclical, not structural. As of FY 2013 Q1, sales in China were down 28% year-over-year. That is probably due to the slowdown in China, not to Best Buy doing a bad job on their international stores. Similarly, European sales were down in Q1 “mid-single digits”.
  • At the same time that sales are dropping in many of the retail stores, online sales are increasing – as of FY 2013 H1, by 14% year-over-year. So some of the apparent drop in sales is just a move from Best Buy physical stores to Best Buy online sales.
  • I suspect at least part of the drop is due to building too many stores when times were booming (there are 9 big-box stores within an easy drive of my house). Joly, the new CEO, recognizes that there is a great deal of difference in store performance, and seems ready to take strong measures. ““We’ve got to stop the comparable-store sales decline,” Joly said by telephone from Minneapolis. “Across our stores, we have a wide range of performance. Leadership and quality of execution make a huge difference at the local store level. If we can improve our execution across the system, there is significant upside.””

Revenue

Although same-store sales have been discouraging, overall revenue has nevertheless held up:

(Incidentally, although it would appear from this graph that revenue suddenly stopped growing in 2010, organic growth probably stopped in 2008 or 2009, as for many other businesses, and the realization of that halt was slowed because, when Circuit City went bankrupt in 2009, Best Buy and others picked up its business.)

The latest result is that revenue for FY 2013 H1 is down 0.8% year-over-year. It is actually a little worse than that, because FY 2013 H1 had one more week than FY 2012 H1. Nevertheless, I think the decline in revenue is mostly cyclical, due to the slowdown in China and Europe, as well as the relatively soft economy in North America, and it is reasonable to characterize revenue as approximately stable.

Free cash flow

The above three measures – US market share, same-store sales, and total revenue – are all different ways of looking at the total amount of business done either domestically or globally. In addition I'd like to look at free cash flow, which is a key measure of the company's ability to create value for the investor.

Here is a re-post of the free cash flow history over the last fourteen years (Best Buy has healthy cash flow).

In the most recent earnings call, Best Buy's CFO said that “we do expect our free cash flow for fiscal 2013 to be in the range of $1.25 billion to $1.5 billion.”

If that turns out to be correct, it will be quite good news on the company's health, as the free cash flow has only been over $1.25 billion in three previous years. Free cash flow, then, also suggests that the company's business, even if no longer growing, is holding up OK.

Previously on Best Buy