In the first quarter of 2013, Best Buy Co., Inc. (NYSE:BBY)’s comparable online sales grew 16.3% year-over-year, and the company specifically noted that revenue growth was higher in states where online sales taxes had been implemented. In the company’s most recent quarter, online revenue once again shined, further suggesting that online sales taxes might be closing the competitive gap between Best Buy Co., Inc. (NYSE:BBY) and e-commerce companies. So, how should you play it?
Growing Online Presence
While investors have focused on the company’s restructuring initiatives and gross profit improvements, it is clear that online sales growth has been the unsung hero of Best Buy Co., Inc. (NYSE:BBY)’s reemergence as a retail powerhouse.
In the company’s latest quarter – causing Best Buy’s stock to rise 13% — total revenue was near flat as comparable store sales fell 0.6% year-over-year. In total, the company reported sales of $9.3 billion, with $7.81 billion being domestic.
Online domestic sales made up just $477 million, or 6.1% of total domestic sales. However, online comparable sales grew a whopping 10.5% year-over-year. If we look at comparable demand, which are pre-orders not yet recognized as revenue, such as game consoles, online sales increased 16% over the prior year.
The Importance Of Sales Tax
E-commerce as a whole has grown rapidly in the last decade, yet Best Buy Co., Inc. (NYSE:BBY) had largely missed the boat in previous years, seeing its total revenue decline by double digits last year. However, to understand the recent surge you must go back to February of this year, when news struck of an online sales tax bill.
The likelihood of such a bill passing has continued to rise, as online sales now account for 5% of total retail (and growing). Since then, more states have implemented a sales tax, and in the process Best Buy’s e-commerce business has exploded with gains.
You might wonder why such a bill is important to Best Buy Co., Inc. (NYSE:BBY). Well, consider a $300 game console, and a 6% sales tax. The price for consumers would be $318 if purchased at Best Buy, or more in states such as Tennessee, which has a near 10% sales tax.
However, if purchased on Amazon.com, Inc. (NASDAQ:AMZN), $300 would be the price. Thus, in an industry with already low margins, Best Buy could not compete with large e-commerce companies, which led to much of the stock’s five-year 80% loss prior to 2013.
What is the outlook?
Looking ahead, Best Buy has a slew of opportunities in front of it. Not only has the company maximized its square footage with new brand-specific product offerings, but the company will benefit from new product launches later this year from the likes of Samsung and Apple. In terms of performance, Best Buy has rallied almost 200% in 2013.
While Best Buy Co., Inc. (NYSE:BBY) has seen its revenue stabilize year-over-year, top-line growth is not the most important metric moving forward, as the stock trades at just 0.25 time sales (50% cheaper than retailer Wal-Mart). Instead, the company needs profitability and higher margins. Looking at the industry, I think restrictions on sales taxes for e-commerce companies could weigh in the favor of Best Buy, as it might allow the company to be more aggressive in its pricing.
Currently, with operating margins of 2%, if Best Buy could slightly raise prices and get margins closer to 5% then I see no reason that it’s not deserving of the same 0.5 times sales valuation of other retailers like Target and Wal-Mart. Thus, allow for upside of 100% from this point forward, if margins can rise.