Best Buy: Market Pricing in Overly Optimistic Growth
While the new Best Buy 2020 plan emphasizes growth focused on multichannel capabilities, products and services that address customer needs, and accelerated Canada and Mexico expansion, these initiatives will not be enough to overcome longer-term structural issues.
Taking this together, we are not changing our $37 fair value estimate. Management's fiscal 2018 outlook for 1.5% revenue growth and low-single-digit operating income growth (flat revenue and operating profits excluding the benefit of a 53rd week) strikes us as appropriate given tepid demand trends, product availability issues, and Amazon's continued disruption. While we appreciate the new Best Buy 2020 plan emphasizing growth focused on multichannel capabilities, products and services that address customer needs, and accelerated Canada and Mexico expansion, we're concerned that these initiatives will not be enough to overcome longer-term structural issues. We view Best Buy as a solid capital-allocation play, evidenced by a 21% increase in its dividend to $1.36 annually and a new $3 billion share-repurchase program, but believe the market may be pricing in overly optimistic growth and operating margin assumptions--we expect operating margins to remain in the mid-4% range the next few years.
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