Skip to main content

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.



) -

Best Buy

(BBY) - Get Best Buy Co., Inc. Report

is a specialty electronics retailer that competes with general retailers like


(WMT) - Get Walmart Inc. Report



(COST) - Get Costco Wholesale Corporation Report

as well as other specialty retailers like


(GME) - Get GameStop Corp. Class A Report


TheStreet Recommends

Radio Shack



Our price estimate for Best Buy stands at $38.48, which is about 20% above market price.

The company's stock has struggled to gain ground since Best Buy's earnings report in December, 2010. Best Buy has seen limited demand for featured products like 3D TVs, and appears to have underestimated competition from players like Wal-Mart and


(AMZN) - Get, Inc. Report


Beyond these challenges, we've also


the developing trend of increased mobile Internet usage, and the potential threat this poses to Best Buy.

Despite these hurdles, we believe Best Buy can benefit from better management of its inventory in 2011 and can also take steps to mitigate the growth headwind created by competitors.

Best Buy recently indicated it is focusing its efforts on more profitable stores, and closing those that are less profitable. The company is also looking to restructure its global operations to yield cost benefits.

Best Buy also has announced store-expansion plans, especially in growth areas like Best Buy Mobile stores in the U.S. and Five Star stores in China.

As a result of the struggles the Best Buy brand had in gaining traction in China, the company has decided to close all its Best Buy brand stores in the region, as well as those in Turkey. Instead, it will push ahead with its Five Star stores, a local Chinese brand that Best Buy acquired some years ago.

The restructuring effort is expected to result in annual cost savings of about $60 million to $70 million beginning in 2013. However, the initiative will cost the company roughly $245 million over next couple of years.How might this affect Best Buy's stock value?

If we assume that costs and savings from the restructuring are incremental to our base forecasts, it implies that Best Buy may see slightly compressed margins over the next couple of years and improvements thereafter.

A back-of- the-envelope estimate suggests the cost savings could lift gross margins by barely 0.15%. This calculation also assumes that all cost benefits are absorbed by the U.S. segment. In reality, this will be spread across all divisions, but the magnitude of the impact can be gauged by making this assumption to simplify calculations.Code for "Best Buy US Gross Profit Margin" chart:

When comparing Best Buy's $50+ billion revenue to expected cost savings of $60 to $70 million, one can see how limited the upside value of these savings will be to the company's overall value.

Drag the trend line in the interactive chart above to see the affect of various U.S. store gross profit margin scenarios on Best Buy's stock value.

Like our charts? Embed them in your own posts using the

Trefis Wordpress Plugin


This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.