Further Growth Could Be Ahead for Best Buy
Best Buy Co. Inc. (NYSE:BBY) could produce further stock growth after its 18% gain over the past year.
The electronic products retailer is seeking to differentiate itself from competitors by offering innovative products and investing in new growth areas to boost its financial performance.
Health care opportunities
Best Buy acquired the health care technology division of BioSensics in August. The company produces innovative wearable technology products that aim to address the specific needs of an aging population. The acquisition increases Best Buy's capacity to reduce health care costs for older consumers and could strengthen its market position in the senior living segment.
The acquisition follows Best Buy's purchase of Critical Signal Technologies last May. Together, the acquisitions could enable the retailer to capitalize on an aging global population trend. For example, between 2020 and 2060, the median age of the U.S. population is forecasted to rise from 38 to 43.
Repair potential
The business is expanding its repair service to increase the number of consumers that visit its stores. For example, all of its stores are now fully certified to provide authorized Apple (NASDAQ:AAPL) repair services. This enables Apple's customers to book a repair at one of Best Buy's stores through the Apple website.
Best Buy estimates that it does not have an existing relationship with around 40% of Apple repair customers that shop at its stores. Therefore, this initiative could lead to cross-selling opportunities for Best Buy's Total Tech Support program, which offers unlimited repairs for all technology products owned by its customers.
Innovative strategy
The company launched an improved version of its mobile app in the second quarter that helps customers select the right TV for their home. Users are able to view three-dimensional virtual TVs that are correctly scaled to size on a wall or table in their home. The retailer has experienced a higher sales conversion rate in TVs due to this new feature, so it could be expanded to include a range of other products in the future.
Best Buy has also increased its use of digital videos that feature its employees providing product insights that help customers choose the right devices for them. They also help build trust among consumers, which could help to differentiate the company from its rivals and strengthen its competitive position.
Potential challenges
The ongoing trade war between the U.S. and China could hurt the company's financial performance. Tariffs are due to be placed on a range of electronics sold by Best Buy in December, including TVs, smart watches and headphones. This may force the retailer to pass on at least some of its additional costs to its customers, which could negatively impact its sales performance.
In response to the threat of higher costs, the business is working to become more efficient. For example, in the second quarter, the company made three distribution centers automated and relocated one of its distribution centers to a larger facility to reduce costs. This contributed to the retailer achieving a $155 million reduction in its annualized costs during the second quarter, which puts it on track to meet its goal of cutting costs by $600 million by 2021.
In addition, it will roll out increasingly flexible payment options for its customers in fiscal 2020. This includes a 90-day payment option that allows customers to buy products that day and pay for them at a later date. This may stabilize its sales prospects at a time when consumer spending levels could come under pressure from higher retail prices.
Outlook
Market analysts forecast that Best Buy will deliver a 4% increase in earnings per share in fiscal 2020, followed by 5% growth in 2021. The price-earnings ratio of 13.2 suggests it offers good value for money.
Disclosure: The author has no positions in any stocks mentioned.
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This article first appeared on GuruFocus.
