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.
continued the trend of disappointing fourth-quarter updates from retailers, as its promotional discipline and cost reductions were overshadowed by soft industry demand and "unprecedented product availability constraints" (calling out Samsung phones, washers, drones, computing, and wearables) that pushed comps (down 0.7%) toward the low end of guidance (down 1% to up 1%). While we had expected Best Buy to stave off the retail malaise via certain product cycles (next-generation TVs and wearables) and an improved online experience, we believe this update underscores one of the concerns behind our no-moat rating, namely vendors' reduced dependence on traditional retailers. Management said industry growth will remain negative and product availability issues would continue into fiscal 2018, though we believe this is symptomatic of longer-term industry trends, and it is baked in our five-year revenue growth outlook calling for flat to modest average annual revenue declines.
R.J. Hottovy, CFA, is a consumer strategist for Morningstar.
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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