Key Takeaways from Best Buy's Update
The retailer continues to improve its long-term competitive position thanks to innovative partnerships and improved customer experience, but shares remain overpriced.
Our takeaways from
On the profitability front, Best Buy continues to strike a balance between investment and cost optimization. Gross margins fell 30 basis points to 23.8% due to supply chain investments and TTS rollout costs but also helped by merchandise margins. The gross margin hit was more than offset by a 50-basis-point reduction in SG&A, with cost control measures negating specialty labor investments for the aforementioned service offerings, resulting in a 20-basis-point increase in operating margins to 3.8%. While the market appears concerned about the softer-than-expected third-quarter adjusted EPS outlook ($0.79-$0.84, versus consensus of $0.92), we're comfortable with Best Buy's service investments ahead of the 2018 holidays.
We're planning to add a few dollars to our $55 fair value estimate for more optimistic near-term sales assumptions. While we recognize the scarcity value of Best Buy's recent outperformance relative to other retailers and see the stock as a solid income play, we see shares as overvalued.
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