MacqTech Express- Implications of Best Buy results: Macquarie Research

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MacqTech Express
Implications of Best Buy results
Event
 Best Buy (BBY US, NR) released weak FY1Q11 results overnight and continued to
lose market share (110bp YoY decline) to discount outlets like Walmart/Costco.
BBY’s weaker results are more company specific in our view (underperformed
Walmart and Costco by 18% and 31% since 29 Oct), and we continue to remain
positive on overall demand elasticity.

Impact
 TV sales decline due to market share loss. TV sales declined double digit YoY
(shipments down low double digits, ASPs down mid single digit), but this is likely to
be BBY specific in our view. Management said it lost market share to “large
discounters” that promoted cheap TV models, while BBY’s strategy of promoting
IPTV and 3D TVs was slower. But management also emphasised LED TVs were
selling well. This is consistent with our view that retail channel competition (BBY vs.
Walmart/Costco/Amzn) will help support promotions in the peak season.

 Other TV brands/outlets doing better. Vizio sell-through was "better than
forecasted" and "much better compared to last year", as per our checks, while
Funai (+30% since 29 Oct) which retails Emerson and Sylvania brands in the US
saw a good sell-through in Black Friday to bring down inventory levels from a 5–6
month high to a 1-2 month level currently. NPD TV sell-through turned positive in
Nov (up +3% YoY) and does not include discount outlets like Walmart and Costco
(which are likely to be better), implying that TV performance is improving, in our
view.

 Notebook (NB) sales weaker. Management indicated that NB sales declined YoY
and was weaker than expected due to a) higher base resulting from the Windows 7
launch last year being significantly more than the industry forecast b) “more overall
customers migrating to tablets” and “customers waiting as they considered their
purchase decisions on tablets vs. netbooks and NBs.”

 Mobile division the bright spot. BBY said mobile performance was strong, with
comps up 30% and the “highest gross profit dollar growth.” Management indicated
a change in consumer spending, with greater focus on smartphones and tablets.
Management also indicated high expectations for the holidays and that the
company will launch new smartphones and tablets and continue its “Free Phone
Friday” campaign. BBY also indicated it saw “very high demand for e-readers.”

Outlook
 US TV sales of global TV brands with exposure to Best Buy are weaker vs other
areas, but largely in line with their expectation, except for Sony (below
expectations). Our checks indicate overall US TV inventory has been close to a
decent level. We prefer Samsung and Panasonic among TV brands.

 With a decent TV sell-through, we see a bottoming and recovery in TFT-LCD sales
in 1H11. We like LGD and AUO among panel makers, and Radiant, Novatek,
Asahi/NEG, Nitto Denko and Chipbond in the LCD supply chain.

 For Taiwan PC hardware, we retain our cautious view on US NB demand due to
cannibalisation of netbooks and matured demand for NBs. We prefer Asustek over
Acer given the former's lower exposure to the US and share gain momentum in
Europe and China. However, our long term top pick remains Pegatron given its lowbase
recovery story.

 We remain positive on smartphone and e-reader plays and believe US demand will
remain strong into 2011; Europe and Asia have also seen rapid demand lately.
HTC, Samsung and E Ink should benefit the most and are our top picks. For
components, our top picks are Unimicron and Catcher but given Catcher's recent
strong performance, we would prefer to enter below NT$100. Rising smartphone
and tablet demand could benefit Samsung and Toshiba due to rising flash
consumption.