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Best Buy/Samsung Mini-Store Initiative Is a Positive, Though Not Without Risk

Written by on April 9, 2013

Best Buy shares are up sharply today, which we attribute to a New York Times article discussing Samsung’s plans to open 1,400 mini-stores inside Best Buy big-box and Mobile stores by the end of June. Terms of the arrangement and square footage allocations were not available, but mini stores will reportedly be called the “Samsung Experience Shop” and feature a wide selection of Samsung products and brand-specific customer support personnel.

Outside of the potential positive traffic implications, we view this announcement favorably, as it assuages some of our concerns about Best Buy being a relevant distribution outlet for consumer electronics original equipment manufacturers, or OEMs.

Although Samsung doesn’t have the same direct-toconsumer capabilities that Apple does, we believe this initiative will help it fine-tune its own retail efforts and ultimately lead to additional store openings. While Best Buy will also be subsidized by Samsung for the mini-stores, we note that wireless products have been extracting a greater percentage of the economic profits within the category, possibly diluting the free cash flow impact of this partnership.

There is no change to Morningstar’s fair value estimate of $16 per share based on this announcement, though there would be modest upside to estimates if the traffic impact pushes near-term comparable-store sales above current estimates (currently calling for a nominal decline during 2013). That said, they will continue to adopt a wait-and-see approach regarding management’s longer-term operating margin goal of 5%-6%, which appears baked into the current share price and depends on much greater in-store and online traffic conversion rates. Their model continues to assume adjusted operating margins of approximately 3% during the next five years.

 

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