The Best Buy Is the Cheap Buy

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Shareholders of Best Buy (NYSE: BBY) would cheer for a daily gain of as much as 20% in the stock price, due to the news that Richard Schulze, the company’s founder would take the company private for “at least $5 billion to $6 billion,” according to the Minneapolis Star Tribune. However, it was not clear whether the buyout included debt or not. Should the news make Best Buy a nice arbitrage for investors? Is the buyout price too cheap?

Stock Volatility on the Growing Number of Stores

The electronic retailer had been a great winner for its shareholder in the period of 2002 – 2006, when its share price increased significantly from $10 in 2002 up to $57.50 in 2006. In the global recession period, it also made a strong come back from $17.63 in November 2008 to $48.60 in April 2010. However, it has kept declining gradually due to the fast growing competition of online retail against the brick and mortar retail business. Best Buy has kept expanding its stores in the last 5 years, from 1,313 in fiscal 2008 to 4,308 in fiscal 2012 with more than 59.6 million square footage in total. The growth has been mainly contributed by the growth of International stores, from only 342 to 2,861 during this 5-year period.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>2012</strong></p> </td> <td> <p><strong>2011</strong></p> </td> <td> <p><strong>2010</strong></p> </td> <td> <p><strong>2009</strong></p> </td> <td> <p><strong>2008</strong></p> </td> </tr> <tr> <td> <p><strong>International Stores</strong></p> </td> <td> <p>2,861</p> </td> <td> <p>2,756</p> </td> <td> <p>2,746</p> </td> <td> <p>2,745</p> </td> <td> <p>342</p> </td> </tr> <tr> <td> <p><strong>Total stores</strong></p> </td> <td> <p>4,308</p> </td> <td> <p>4,073</p> </td> <td> <p>3,936</p> </td> <td> <p>3,852</p> </td> <td> <p>1,313</p> </td> </tr> <tr> <td> <p><strong>Comp <span><span>stores</span></span> growth (%)</strong></p> </td> <td> <p>-1.7</p> </td> <td> <p>-1.8</p> </td> <td> <p>0.6</p> </td> <td> <p>-1.3</p> </td> <td> <p>2.9</p> </td> </tr> </tbody> </table>

Along with the extreme growth in the international footprint, Best Buy experienced a fluctuation in comparable store sales growth, and it has been declining in the last 2 years.

Bad Move in Europe

However, in terms of cash flow, since fiscal 2004, Best Buy has managed to consistently generate positive but fluctuating operating cash flow and free cash flow over time. But the positive free cash flow figure in 2009 is quite misleading.

<table> <tbody> <tr> <td> <p><em>USD million</em></p> </td> <td> <p><strong>2008</strong></p> </td> <td> <p><strong>2009</strong></p> </td> <td> <p><strong>2010</strong></p> </td> <td> <p><strong>2011</strong></p> </td> <td> <p><strong>2012</strong></p> </td> </tr> <tr> <td> <p><strong>Operating Cash Flow</strong></p> </td> <td> <p>2,025</p> </td> <td> <p>1,877</p> </td> <td> <p>2,206</p> </td> <td> <p>1,190</p> </td> <td> <p>3,293</p> </td> </tr> <tr> <td> <p><strong>Free Cash Flow</strong></p> </td> <td> <p>1,228</p> </td> <td> <p>574</p> </td> <td> <p>1,591</p> </td> <td> <p>446</p> </td> <td> <p>2,527</p> </td> </tr> </tbody> </table>

Best Buy’s operating income has plunged from nearly $2.4 billion in fiscal 2011 to only more than $1 billion in fiscal 2012. It was due to a more than $1.2 billion goodwill impairment charge of Best Buy Europe that the company took during the year. However, the free cash flow in fiscal 2009 hasn’t included the acquisition of a 50% stake in Best Buy Europe for $2.2 billion, which helped to increase its total international store count significantly. 3 years later, the impairment charge wiped out more than 50% of the total purchase price.

Is Schulze Getting the Bargain?

Previously, in early August, Schulze already made the buyout offer to Best Buy for around $24 - $26 per share, valuing the total retailer at $8.8 billion. Currently, it was trading much cheaper. At $14.12 per share, the total market capitalization is $4.77 billion. Including $1.2 billion in debt, the total transaction value would be close to $6 billion, or $5.7 billion net of cash. However, Best Buy still had nearly $1.7 billion in goodwill and intangibles, which I think will be likely to get impaired again in the near future. Currently, the tangible book value of Best Buy is only $7.20 per share, half of its market price.

There has been an increasing diverse opinion about whether Best Buy could compete with Amazon (NASDAQ: AMZN). Some said that shoppers might browse and try products at Best Buy and then purchase at Amazon. David Einhorn, in the middle of this year, has commented that the store surveys showed that there was no price benefit for doing that. The sluggish performance domestically might be due to the fact that the retailer didn’t have the “must have” consumer electronic products, rather than its competitive position with other retailers including Wal-Mart (NYSE: WMT) and online retailer Amazon. Interestingly, the market is valuing Best Buy at only 2x EV/EBITDA, whereas Wal-Mart is valued at 7.8x EV/EBITDA. Amazon is the most expensive, with nearly 52x EV/EBITDA.

Foolish Bottom Line

Best Buy is quite cheap at the current price. The bad performance in Europe has cost Best Buy dearly, in terms of the acquisition price and the impairment charge, which reflect in the stock performance. Investors might consider Best Buy to be in an opportunistic position if they are willing to take on risk.


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Motley Fool newsletter services recommend Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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