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Best Buy and Healthcare: a Doomed Combination?

Best Buy (NYSE: BBY) is moving deeper into the healthcare industry in a move that has many investors scratching their heads. But it might be a lucrative strategy over the long term.

In this video from "The 5" from Motley Fool Live, recorded on Oct. 12, Fool contributors Jose Najarro, Brian Withers, and Demitri Kalogeropoulos discuss why the retailer's push could be good news for shareholders.

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Brian Withers: Jose, I love this article that you forwarded me before the show. I wouldn't have run into this had you not forwarded it. It's Best Buy of all companies are pushing into the healthcare business. They are acquiring a company called Current Health, which is focused on remote monitoring and telehealth service.

You might be like, wow, that's totally crazy for Best Buy. But what you don't know is they've already purchased two other small healthcare device company. This isn't just a one-off whim, this is Best Buy, I feel like they're going serious into the healthcare space. Is this a good idea for Best Buy? Why or why not? Demitri, I'll put you up first.

Demitri Kalogeropoulos: I'll start with the good news first, I did look at the SEC filings. The good news is it's a relatively small acquisition. They said it's going to be paid for out of their cash they aren't going to take on any debt for this. And in the regulatory filing they said it's not going to jeopardize their plan to send more than $2.5 billion back to investors this year in stock buybacks.

They're making that point that this is on the smaller side, but still I'm not thrilled with the strategy, to be honest. It seems like it might be a distraction from the core retailing focus of the company.

But that said, I know Best Buy, it's a trusted resource for a lot of customers who want to buy consumer technology and not necessarily just buy it online. They want a little bit more of a hands-on approach. They might have some questions they want answered, and they want knowledgeable staff that can help them through some of the trickier parts of getting the stuff set up. The industry is definitely moving in that direction toward this connection with more health focus.

You've got those smartwatches and fitness trackers that can do blood glucose and oxygenation levels in your blood, and heart monitors, and all that stuff. I know that Best Buy more than doubled its wearables and fitness tracker selection in the stores over the last year. That's definitely a strategy of theirs. It fits in there pretty well.

I know CEO Corie Barry wants to do more in this area. Also, I do believe management is going to have some leeway here because Best Buy's just growing so well right now. Their sales were up 27% in the last six months compared to the prior-year period.

Operating margins have almost doubled. They're at 7% now, which is great for them. It was about 4% a year ago.

With blockbuster numbers like that, I think Wall Street can give you a lot of leeway. I don't think investors are going to second-guess too much about what they want to do, particularly if these are on the smaller side, but I guess if they do make bigger acquisitions or try to take on debt, or do something that's going to be complicated enough to take a lot of management time away from the core retailing focus, I could think investors would start asking harder questions then.

Withers: What do you think, Jose?

Jose Najarro: I agree with Demitri how it takes off from the main goal for Best Buy. I honestly would have preferred if Best Buy shake it off into a sub-business. Like Demitri says, small purchase. But then what they did in 2018, they purchased a company called GreatCall and that was about a $800 million deal.

It seems they're definitely putting some money behind this. I think it would be more interesting if maybe the next thing they purchase off might be some form of wearable because what they're doing is they're trying to collect all these healthcare wearable items.

For example, the one that they purchased right now is Current Health. The technology allows healthcare organizations to monitor patients at home and uses data from sensors from your wearables to give to your doctor. That makes sense.

Best Buy has a lot of wearable products in them. I think it would make more sense if Best Buy actually had their own individual wearable product system, not something that they have from other companies.

To me, I'm not a huge fan, but they've been doing it for the past three years. Who knows? Maybe once they have enough amount of companies within this market, they might venture it off into another market and make a sub-business out of it, but I'm not too excited about it.

Withers: Yeah. For me, I'm really surprised Best Buy has survived as long as they have. Circuit City went bankrupt. There are a number of other electronics retailers, if you call RadioShack an electronics retailer. But there's a long history of electronics retailers that haven't made it. Best Buy has always been one to experiment. They got the Geek Squad. They sell a lot of appliances actually now in their stores.

I remember you used to go to Best Buy and you could buy DVDs and music CDs, and stuff. I was always curious what would happen with Best Buy when all of that floor space disappeared? Well, they've put it to good use.

I'm intrigued by this move. It will be interesting to see where they take it. There are a number of medical device retailers that pop up that deal with insurance.

They've been on the news for not so up-and-up behaviors, but certainly if Best Buy could make that experience less of a price gouging thing and much more of a competitive pricing and potentially being able to use your insurance in the store to get a discount on things, they might have something here.

I know Apple is moving hard into this electronics space and you name it. With Teladoc and the whole telehealth movement, having things like connected blood pressure cuffs or oxygenation levels, you can test these things at home and have a virtual connection with your doctor without having to drive and do the whole waiting room thing.

I think this could pay off. I don't know that their business is going to become a healthcare business in the next five years, but I like the move. I like it when companies try something. What do these guys got to lose to me is electronics continues to be a cut-throat business and low margin.

It's almost like grocery store business now, it's all about throughput.

If they can get into some higher-margin things and potentially make this easier for patients to get the kind of devices that they need at reasonable prices, I think that could be something.

Brian Withers owns shares of Teladoc Health. Demitri Kalogeropoulos owns shares of Apple. Jose Najarro owns shares of Teladoc Health. The Motley Fool owns shares of and recommends Apple and Teladoc Health. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.


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