Best Buy ‘Last Man Standing’ to Gain on Sears Bust

Shares of consumer electronics retailer Best Buy Co. (BBY) got a boost this week on an upbeat note from one team of analysts who expects the recent hardships faced by Sears Holdings Corp. (SHLD) to benefit the company. 

In a note to clients on Tuesday, Loop Capital bulls argued that Richfield, Minnesota-based Best Buy could gain if Sears fails to emerge from bankruptcy court, as outlined by CNBC

'Likely' Sears Liquidation to Boost Best Buy's Comp Sales Growth

On Monday, Sears filed for bankruptcy protection, a move that the Chicago investment bank says is "likely to eventually result in a complete liquidation."

"We think Best Buy will pick up its fair share — particularly on the consumer electronics side given the fact Best Buy is the 'last man standing' in terms of dedicated national brick-and-mortar retailers," wrote Loop Capital's Anthony Chukumba. 

The analyst expects a full Sears liquidation to add an extra $0.47 to Best Buy's fiscal 2019 earnings per share (EPS), given that 85% of all Sears stores are within a five-mile range of a Best Buy location. In this best cast scenario, Chukumba pegs a 15% sales transfer rate from those roughly 600 Sears and Kmart locations and a 25% incremental operating margin, writing that a complete liquidation could add 80 basis points to lift comparable sales growth at Best Buy. 

Chukumba suggests that it's just a matter of time until Sears will liquidate, as the retailer survives on continued funding from former chief executive officer Eddie Lampert's hedge fund ESL Investments. The hedge fund owns roughly 19% of Sears shares outstanding, in addition to the 31% stake that Lampert holds himself. 

"The vast majority of large retail bankruptcy filings over the past several years have resulted in liquidations," noted the Loop Capital analyst. 

That being said, Sears' filing included a plan to close just 200 of its approximately 700 physical locations by the end of the year. 

Closing up 2.5% at $74.81 on Tuesday, Best Buy shares reflect a 9.3% increase year-to-date (YTD) compared to the S&P 500's 5.1% gain over the same period. 

Chukumba, who rates Best Buy stock at buy, expects the shares to gain 17.6% over 12 months to reach $88 a piece. 

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