How a traditional brick-and-mortar store has managed to successfully move into the digital world?

Right management. Right decisions. Right Results.

As we all know 2020 has proven to be a very challenging year for many individuals and businesses as a result of the COVID-19 related lock-downs and economic shut-downs, which have quite honestly put the global economy on the ropes. The remarkable efforts of central bankers and politicians around the world for ensuring that the flow of liquidity in the market doesn’t stop and that people have everything they need to survive this difficult period, have also proven to be of essential importance for keeping the ball rolling. Multiple different and unprecedented monetary and fiscal measures have been taken in order to stimulate consumer spending, productivity and small-business operations as these are the most influential factors for the overall economic well-being of every nation. With shelter-in-place and social distancing orders going into effect many businesses have had to find a way of changing their core business model in order to stay relevant and functional. The brick-and-mortar sector has experienced major store shut-downs, as people are not willing to risk their health by buying things physically from the store anymore. This has led to a meaningful shift towards online shopping, which has forced some of the old-fashioned retailers like Best Buy to adapt accordingly and build a solid online presence.

The senior management of the company has done a remarkable job adapting the this new environment for the business and some of the most recent business and financial metrics that we saw from Best Buy Inc. also confirm that. Best Buy’s online sales continued to grow in the second quarter of fiscal 2021, backed by the shift in consumers shopping patterns amid the pandemic. In fact, the company’s domestic comparable online sales increased 242.2% to $4.85 billion, mainly owing to higher traffic and conversion rates. As a percentage of overall domestic revenues, online revenues skyrocketed 3,700 bps to 53.1% compared with 16.1% recorded in the prior-year quarter. During the quarter, the company witnessed strong demand for some of its newer products like digital health and fitness, at-home fitness equipment, sustainable living, outdoor activities and camping equipment. This performance has helped the company to achieve a 4% and 82% increase in revenue and net income respectively. It is more than obvious that the bottom line has experienced a remarkable boom, and much of the increase was due to lower operating expense, as the company was able to use its stores to fulfill online orders via local shipping or curbside pickup.

Best Buy is not being complacent with their consistent and solid performance and are constantly looking for ways to further expand and improve. The key growth initiatives underlined by the company are Best Buy Health and supply-chain transformation. Naturally, it is committed toward strengthening partnerships with vendors, focusing on offering services and solutions to meet varied customer needs, and optimizing costs. These initiatives and endeavors are expected to lift the company’s top line in the long rung and will unquestionably increase the overall profitability. The company’s long-term financial goal is the testimony to the same. Management continues to envision enterprise revenues of approximately $50 billion with adjusted operating income rate of 5% by fiscal 2025. The consumer electronics retailer also intends to reduce costs by about $1 billion by the said period.

Best Buy continues to put a lot of efforts towards the improvement of the online purchases and pickup in store services. Apparently, all of the company’s stores are capable of shipping out online orders, which is a great operational and strategic advantage for Best Buy. In fact, 250 locations are currently being strategically positioned and modified to be able to ship out more volumes. The company is also continuing to add third party physical pickup locations for online orders to enhance flexibility and convenience for its customers. Also, it is adding new functionalities to its curbside pickup services for driving frequency, retention and personalization opportunities. It really seems that the management of the company knows what it is doing and we could easily conclude that with such well-thought and organized plans Best Buy is likely to keep seeing strong growth in its online revenues. Reportedly, domestic online sales were up nearly 175% for the first three weeks of August.

What is Best Buy Inc.?

Incorporated in 1966 and headquartered in Richfield, MN, Best Buy Company Inc. (BBY) is a multinational specialty retailer of consumer electronics, home office products, entertainment software, communication, food preparation, wellness, heath, security, appliances and related services. The company operates in the United States, Canada and Mexico.

Best Buy operates through two business segments:

Domestic Operations (92.1% of Q221 total revenues) & International Operations (7.9% of Q221 total revenues):

Both segments are engaged in the development of merchandise and service offerings, supply chain and procurement, pricing and promotions, online and mobile operations along with marketing and advertisements on omnichannel platforms. Moreover, Best Buy provides its customers with the option to pick a product at its store or to get the product directly delivered to their homes. The delivery of Best Buy’s products is fulfilled through its distribution centers or retail stores. Further, the company’s ship-from-store facility enables it to expedite the delivery process and improve product availability.

Financial Performance

Starting with the company’s Balance Sheet, we can add another serious argument for supporting the bullish thesis for Best Buy’s stock. It is impressive to see how an old-fashioned brick-and-mortar retailer like Best Buy has managed to actually boast a net cash position – a rarity in the traditional retailer world. At the end of July, Best Buy had $5.31 billion in cash and equivalents and only $1.31 billion in debt. Even in a world where COVID-19 doesn’t exist, this is an enviable position to be in and puts this 2.1% yielding dividend stock on solid footing.

Thus, even though that sales might seem somewhat “sluggish” when compared to the likes of Amazon for example, the profitability for Best Buy is quite high as the company has managed to use its rock-solid fundamental and financial positioning adequately and has focused its main attention to the unlocking of new efficiencies through its real estate portfolio in the digital age. Shares look like a more than fair price, considering the bottom-line potential here.

Shares of Best Buy have surged 30.1% over the past three months, compared with the industry’s 26.8% rally. The stock got a further boost following the company’s robust second-quarter fiscal 2021 results, with the top and the bottom line improving year on year and surpassing the consensus estimates. Best Buy’s second-quarter fiscal 2021 marked the 11th straight quarter of positive earnings surprise. Also, the company’s top line surpassed the consensus mark for the fourth successive time. Top-line results in the quarter gained from growth in products that support stay-at-home practices such as tablets, computing devices and household appliances. Moreover, as the company opened its stores more broadly, it witnessed growth across most categories. Management pointed out that large appliances and home theaters benefited from more experiential shopping.

During the second quarter, the company’s enterprise revenues rose nearly 4% year over year to $9,910 million. In fact, enterprise sales growth was nearly 16% in the last seven weeks of the second quarter, after the company had fully reopened its stores. It’s worthwhile to note here that for the first six weeks of the quarter, the company’s stores were open on an appointment-only basis. Further, enterprise comparable sales were up 5.8% compared with 1.6% growth recorded in the prior-year quarter.

Additionally, during the second-quarter adjusted operating income surged nearly 54% to $588 million, while adjusted operating margin expanded 190 bps to 5.9%. Operating margin gained from lower SG&A expenses stemming from balanced but prudent decisions to lower costs, in response to the pandemic-induced uncertainties.

Throughout the last more than 10 years, the low interest rates on a global scale have created an environment of relatively high indebtedness for most companies out there, as it has been extremely easy and relatively cheap for anyone who wants to access capital, to do so. Thus, we are used to seeing elevated levels of Long and Short-term debt when analyzing different companies and their Balance Sheets and it is very rare to find a company that has managed to keep its overall indebtedness levels constant or even lower them over time. Best Buy Inc. is a perfect example of not only a solid financial performance but management as well. Best Buy’s long-term debt of $632 million as of Aug 1, 2020 decreased 49.3% sequentially. In addition, Best Buy had cash and cash equivalents of $5,305 million as of Aug 1, which increased 35.4% from the previous quarter and is higher than the company’s long-term debt. Moreover, the company’s times interest earned ratio stands at 35.4 at the end of the second quarter, higher than the industry’s ratio of 12.6. The times-interest-earned ratio is very important for some companies, as it measures a company’s ability to meet its debt obligations based on its current income. As of April 22, 2020, the company’s corporate credit ratings from Standard & Poor’s and Moody’s Investors Service are BBB (stable outlook) and Baa1 (stable outlook), respectively.

Technical Analysis

As we have already stated above, the company has managed to keep on delivering great financial results and that has been extremely positive for its share price performance over the past 7 years.

By looking at the chart, one could see the strong uptrend that the price has been following during that period of time. As a matter of fact, Best Buy was trading at only $27 per share in the beginning of 2016 whereas in the beginning of October made another attempt of breaking the $119 all-time highs. In other words, it has managed to more than triple its investors’ wealth over that period of time.

The technical picture on the daily chart shows clearly the strong bullish rally that has occurred in the last 5 months taking the price from the March 23rd lows of around $50 to the $119 highs in the beginning of September. This represented a phenomenal 138% appreciation for the stock in the last 5 months. Since then, we have seen a volatile correction that initially took the price down with 13% in the first 2 weeks of September, before it quickly recovered to its prior highs in the 2nd part of the month. The stock is currently sitting at the $117 mark right at the confluence resistance zone of $119, where we saw the price being rejected strongly last time. The strong and immediate horizontal, diagonal and dynamic support currently lies around the $109 mark. In case this level gets broken to the downside, this might open the door for a much stronger correction down towards the $100-103 support levels. Such a correction could be anticipated as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it is now more than normal for us to see a certain downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the upcoming presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we expect that the winners will continue to win. We remain bullish on the BBY stock as long as the stock remains above the $100 level and believe that all these profit-taking corrections are giving us great opportunities to buy the stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. However, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent appreciation and are signaling that the uptrend might be in danger if certain key support levels are broken. Thus, we are not advising our followers to go ahead and start buying the stock right now at its all-time highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

We believe that the short-term correction for the stock should end around the $103 mark and that it will resume its uptrend movement afterwards. However, if the price manages to break the $100-$103 strong support levels, then it would be heading towards the other strong horizontal and psychological support at $92-93. The stock is expected to find lots of buying pressure there, which will inevitably send the price back to the $119 highs

We will start buying BBY at the first key diagonal and horizontal support lines currently overlapping around the $108 mark where lots of buying pressure is expected. Should the price break that level to the downside we will be buying more aggressively at the next key support at $100-103 where we will be able to get a better average cost basis for our positions. Our initial profit-taking target is set at $119, followed by the next target at $135 where we will be fully cashing in our profits and waiting for another profit-taking correction that would give us a chance to buy again at a discount.

Dow Theory 2.0 – Correlation Confirmation

Dow Experts’ approach has always been based on identifying the next great movement in the market by analyzing both the fundamentals, the technicals and all-important factors that have an impact on the price. Furthermore, our cross-correlation analysis allows us to act in the market only if the movement on the chart is confirmed by the other key ETFs and indices that we use in our investing philosophy.

As you know, the Dow Theory 2.0 includes more than 30 correlations between different ETFs and stock market indices, which give us a chance to confirm whether a certain movement in the market is worth taking action for.

Therefore, in order to determine whether Best Buy is a good stock to buy with respect to the current levels of the price we have decided to analyze the performance of both the SPY (Select Sector SPDR S&P 500 ETF Trust) and the XLY (Consumer Discretionary Select Sector SPDR Fund). The two ETFs share a very strong and positive 94% 10-year correlation, which would allow us to confirm some of the signals that we are getting with a great deal of certainty. The SPY is the largest, most liquid and most commonly traded ETF out there that invests in the 500 most well-capitalized companies in the US, and by doing so it mimics the performance of the S&P 500 benchmark index. Best Buy is not one of SPY’s biggest holdings with its current 0.09% weight within the ETF, but that is clearly understandable as there are much larger companies out there that are keeping the higher percentage numbers. However, this should definitely not be taken as a negative for the stock, but rather as a positive, as the company is still not so popular among traders and investors and as a result of that the its valuation metrics are much more favorable than some of the other leading tech companies out there.

By looking at the daily chart, one could see a very similar movement on the SPY, compared to both the chart of Best Buy and XLY. Due to the coronavirus outbreak earlier in the year, the SPY made a 35% correction, dropping from its highs at $339 towards the key support at $221 where it found lots of buying interest, which ultimately led to one of the strongest rebounds in the history of the stock market as the SPY has appreciated with 62% in just 5 months. There has been a lot of speculation and discussion recently on how come the US stock market continues to rally when the US economy is barely trying to survive in the current COVID-19 environment. However, as we know the technical charts reflect the overall fundamental picture and the investors’ sentiment in the market. At the moment, the remarkable and relentless fiscal and monetary support provided by the government and the Fed is acting as a safe net for this highly overbought and overvalued market. The support will continue, but how much longer could the market continue to grow in this environment.

Similarly to Best Buy and XLY, the SPY experienced a volatile correction in the first 2 weeks of September that took the price down with around 5-6%. The ETF is currently sitting at the $346 mark after rebounding from the strong dynamic 50 DMA support at $330, which also overlaps with another strong horizontal support positioned at $332. This correction back in September was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it is now more than normal for us to see this downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the upcoming presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we see that the winners would most likely continue to win. The strong rebound that we have seen in the first part of October allows us to remain bullish on the SPY ETF and to further believe that all these profit-taking corrections should be treated as great opportunities to buy one of the most well diversified ETFs and some of the stocks in it at a good discount. Furthermore, this would in turn give us a chance to maximize our profits to the upside and finish this year in a strong and profitable manner. However, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing early signs of exhaustion of the recent upward movement and are signaling that the uptrend might be at risk if some of the key support levels on the chart are broken. Thus, we are not advising our followers to go ahead and start buying the stock right now at its all-time highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

SPY’s recent performance is very similar to the one of Best Buy and the XLY. The price made a 35% correction during the recent sell-off due to the coronavirus outbreak and that led to a huge downside movement from the highs at $340 back in the middle of February to the lows at $220. The daily chart shows that throughout its most recent declines the price failed to break the key support marks at $330. Furthermore, the technical indicators were approaching oversold territory, which resulted in a quick exhaustion of the depreciation that we saw in the beginning of September. Since then, we have seen multiple further bullish indications and the price has continued on its way of reaching once again its prior all-time highs. Last but not least, there is a clear divergence between the indicators and the price action on the chart, which clearly confirms our both short-term cautionary and long-term bullish expectations for the future when it comes to the SPY, as well as the XLY and Best Buy.

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 5 months taking the price from the March 17th lows of around $85 to the $154 all-time highs in the beginning of September. Since then, we have seen a 9.1% correction for the XLY in the first part of September, which was quickly recovered in the last 2-3 weeks, as the price is back to its prior highs at the moment. The ETF is currently sitting at the $153 mark testing the strong psychological and all-time high resistance at $154. The correction back in September was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it was more than normal for us to see this downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the upcoming presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we see that the winners would most likely continue to win. We remain cautiously bullish on the XLY ETF and believe that all these profit-taking corrections are giving us great opportunities to buy the this good performing ETF and some of the stocks in it at a good discount, which would in turn give us a chance to maximize our profits to the upside. However, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent upward movement and are signaling that the uptrend might face some headwinds very soon. However, it is important to note the fact that the XLY only came down with 5-6% throughout the last decline, whereas the broad market tumbled with almost 8%, with some specific sectors seeing declines of over 10%. This makes us rather cautiously optimistic for the performance of the ETF as even if there is a short-term price decline coming soon, we believe that this ETF will be able to hold its ground better than some of the other ETFs out there.

The daily chart shows that the price is currently testing the key resistance line at $154, which actually matches with the all-time highs for the stock. Considering the fact that the price is currently sitting at this high level and there is plenty of uncertainty in the market at the moment, we are expecting to see a short-term correction taking place in the coming days and weeks. As mentioned above, the technical indicators that we are monitoring closely are also signaling that certain exhaustion currently exists in the market. The fact that all three charts that we’ve analyzed are showing the same exhaustion patterns means that there is a roughly 94% chance for the XLY to move slightly lower in the coming weeks, before it resumes its strong long-term uptrend. If we see the price breaking down below the initial strong support levels at $146 and $140, then we could expect a steeper decline towards the next major horizontal support line at $132 and the 100 DMA at $131 where lots of buying pressure is expected to occur, thus sending the price back to the all-time highs around $153. Thus, we are not advising our followers to go ahead and start buying the stock right now at its all-time highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

Conclusion

In conclusion, after analyzing Best Buy’s fundamentals, new products and features, recent financial performance, as well as the technical picture and the recent sell-off, followed by an immediate bullish reaction as well as the general exhaustion of that bullish reaction, we have been looking for confirmations by the key ETFs where Best Buy participates in, so that we could get a further confirmation for our short-term cautiously bullish stance for the stock in the future. Both XLY and SPY confirm our expectations for an initial short-term weakness before the resumption of the long-term bullish trend for Best Buy’s stock. Thus, we will take advantage of the great long-term bullish potential, by joining in after the initial correction takes place this month.

We will wait for a short-term correction to the downside from the current levels at $117 and start buying BBY’s stock at around $108. Should the price drop further in the short to middle term, we will be adding more to our buy positions at the next strong support mark at $100. In case of a further drop in the short-term, we will be interested in buying more aggressively again at the next key support at $91-92 where the key horizontal and diagonal supports match and a lot of buying activity is expected to take place. That way we will be able to improve our average cost basis and be able to get a better average price on our long holdings on the stock.

As the price starts to reverse back to the upside, we will be interested in collecting our first profits at the $120 mark. Our next profit-taking area is staying at $135 where we will be collecting the majority of our profits.

Sincerely,

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