Financial Analysis| Best Buy | FINC 5000| Luis G Zapata Jr 12/1/2011 | Abstract Best Buy started in Minnesota in 1966 as Sound of Music, Inc. and began as an audio components retailer, but with the introduction of the videocassette recorder in the early 1980’s it expanded into video products. In 1983 Sound of Music officially changed their name to Best Buy and began using mass-merchandising techniques, which included offering a wide variety of products under a “superstore” concept.In 1989, Best Buy changed their retailing methods by introducing a self-service, noncommissioned, discount-style store designed to give customers a variety of consumer electronics, home office products, entertainment products, appliances and related services. Best Buy like many retailers make their profits on a seasonal basis, it is fact that most of their revenue and earnings happens in the fiscal fourth quarter.
Currently Best Buy is a multi-national retailer that operates two reportable segments.The Domestic segment is comprised of all operations within the U. S. and its territories.
The International segment is comprised of all operations outside the U. S. and its territories including China, Canada, Mexico and the U. K.
Overview of Domestic Segment Best Buy currently operates in two reportable segments which are domestic and international. The domestic segment compromises not only of Best Buy but also includes Best Buy Mobile, Geek Squad, Magnolia Audio Video, Napster and Pacific Sales.While the international segment consists of operations in Canada, Mexico, Europe, and China with companies such as Connect Pro, The Carphone Warehouse and Five Star. The domestic entities include Magnolia Home Theatre which offers customers a store within-a-store experience with high end electronics and specially trained employees. On the other hand Geek Squad provides repair, support and installation services to customers, while Best Buy Mobile provides a comprehensive assortment of mobile phones, accessories and related services that are now their own stand–alone stores in addition to being in all U.S.
Best Buy stores. Best Buy has also ventured into other technological venues such acquiring Napster, this decision was made in order to provide customers with digital music downloads and on-demand streaming capabilities which is a new trend in the music industry. Best Buy Cinema Now is another service that provides customers with digital streaming of movies and TV shows, this is in response to companies such as Netflix and Hulu that have cut into the purchasing of DVD’s and Blu-Rays.Overview of International Segment Best Buy established an international segment in 2002 with its acquisition of Future Shop LTD. , which is Canada’s largest consumer electronics retailer.
In 2003 Best Buy decided to go for a dual-branding strategy by introducing the Best Buy brand in hopes to not only retain the Future Shop’s brand equity but to also attract more customers by offering a choice of distinct store experiences. In 2007 Best Buy acquired 75% interest in Jiangsu Five Star Appliance Co. Five Star is one of China’s largest appliance and consumer electronics retailer, this move was made with the intention to expand international growth while increasing the knowledge of Chinese customers and to obtain an immediate retail presence in China. In 2009 Best Buy completed the acquisition of the remaining 25% interest in Five Star.
On the European front Best Buy has a 50% share in “Best Buy Europe” with a partnership with CPW expansion is planned for the U. K. and Spain with the idea to introduce Best Buy Mobile and Geek Squad in these markets.During 2011 a large format Best Buy store opened up in the U.
K. to establish a presence in Europe and expansion has also spilled over to Canada and Mexico. Unfortunately by fourth quarter fiscal of 2011 Best Buy announced it would exit the Turkey market and restructure the Best Buy branded stored in China during 2012. The exit from Turkey includes exiting two Best Buy branded stores while also restructuring activities in China by closing all eight Best Buy branded stores.
These changes were necessary with the growing instability in Europe and with the ever changing economy inChina so in the meantime “Best Buy has decided to explore more profitable growth options for the Best Buy brand in these markets, including the option to reopen two of the closed stores in China at a later date”. () Strengths Best Buy infrastructure has to be its primary strength starting with its operations, merchandise and services, distribution, and suppliers both in the domestic and international segment. Best Buy store operations are divided into districts and are under management of a retail field officer who oversees store performance through district managers. District managers monitor U.S. Best Buy store operations and meet regularly with store managers to discuss merchandising, new product introductions, sales promotions, customer loyalty programs, employee satisfaction surveys and store operating performance.
In the international segment each of the nine European countries run their operations at a smaller level than the Best Buy branded stores but the rest of the branded stores in those territories run an operating model similar to that used in the U. S. stores. The only differences would be in Canada and China where Best Buy runs and supports two principal brand companies.In Canada the Future Shop stores “Have commissioned sales associates who take a proactive role in assisting customers and driving the transactions”.
() Advertising, merchandise purchasing and pricing and inventory policies are centrally controlled and the same policies applied to the stores in China up until there closing. Another part of infrastructure for Best Buy is its merchandising and services which has six revenue categories. Consumer electronics, home office, entertainment, appliances, services and other services make up the stores revenue.The others are classified as Best Buy Mobile and Magnolia video stores which provide high end merchandise for Best Buy customers. Distribution is also an important part of infrastructure for Best Buy and it is handled directly by manufacturers who deliver the products to distribution centers and only appliances and large-screen televisions are shipped to satellite warehouses in each major market.
Best Buy stores are dependent of the distribution centers for inventory storage and only certain merchandise, in order to meet release dates are shipped directly to the store.In order for Best Buy to remain competitive in the market its suppliers are the most valuable part of its infrastructure because in order to offer customers a broad selection of name-brand products there success is dependent upon satisfactory and stable supplier relationships. Best Buy’s 20 largest suppliers accounted for just under “65% of the merchandise purchased while five suppliers such as Apple, Samsung, Sony, Hewlett-Packard and Toshiba represent 39% of total merchandise purchased”. ) Best Buy does not have long-term written contracts with its major suppliers and have no indications that any of their suppliers plan to discontinue selling them merchandise but the loss or disruption could have an adverse effect on their revenue and earnings. Weaknesses Best Buy has many similar weaknesses of many Fortune 500 companies at the present time, but in the business that Best Buy these are their current weaknesses. Retention is a general weakness for most retail stores and one could assume that qualified individuals are hard to come by in the electronics industry.
The success of Best Buy depends on the ability to attract, develop and retain a sufficient number of qualified employees. Best Buy promotes from within and if they lose employees this could hinder the placement of administrators within the stores. The inability to recruit a sufficient number of qualified individuals may delay planned openings of new stores and delay store openings which in turn could affect business, financial condition and operations. The dependence of vendors is a weakness that could cripple Best Buy if vendors fail to supply them with their products.Since no long-term contracts are in place Best Buy is dependent that vendors will continue to supply them products and new technology as well.
Although all vendors are required to comply with applicable laws “20 of the largest suppliers account for 65% of the merchandise Best Buy purchases”. () A perfect example are some of the line of Sony products carried by the store are either sold-out or on backordered do to the horrible tragedy of the earthquake that struck Japan this year, since this is the holiday season certain products will not be available which will affect some revenue for Best Buy this holiday season.Lastly Best Buy has changed there policy on restocking fees and have opted to go without restocking fees which was in response to other competitors namely internet sites that offer free returns. This could only hurt Best Buy in the long run because once a customer returns an item it’s automatically discounted 10% and returned to the shelves as an open item.
Ultimately these products hurt margin and when they are stocked for an excessive period of time, they are further discounted to get them off the shelves and make room for more open item products.Being able to fill consumers’ needs is always tricky with electronic products and Best Buy has to look into finding a better model to limit returns in order to not hurt profitability. Opportunities Best Buy labels it core goal as a Connected World, the strategy is based with the idea “To demystify and humanize technology to help customers get the most out of the rapidly expanding role the technology plays in their lives”. () On this principle and the fact that Best Buy employees 180,000 people around the world, there are many opportunities for the company to grow.There current growth opportunities include further expansion in Best Buy Mobile, particularly with the growing selection of tablet computers which would require some form of 4G services to get access to internet content at all times.
The recently launched “Buy Back” program is also an innovative opportunity to encourage customers to come back and in some way guarantee that they will come back to make future purchases in the store. The “Buy Back” program works by the customer buying the program at the time of purchase that will guarantee them some monetary value when the life of their product reaches its life limit.Since everything is about connectivity these days, opportunities can be found in streaming movies and music, internet and making connections through your television set. Best Buy online growth plans also include allowing external vendors and retailers to sell through their website, further extending their reach by allowing partners to market products by leveraging online traffic to sell advertising that could bring in revenue which would help out in the expansion of their brand. ThreatsBest Buy management already has a sense of their threats as do many companies in the retail market at the present time.
Primarily economic conditions in the U. S. and international markets are of major concern because a decline in consumer discretionary spending or other conditions have an adverse impact on operating results. Many consumers may view Best Buy’s products and services as discretionary items rather than necessities. This in turn makes it more difficult for consumers to justify big ticket item purchases and also impact customers’ ability to obtain consumer credit at time of purchases.A further slowdown in the U.
S. or global economy or even an uncertain economic outlook, could adversely affect consumer spending habits and operating results for Best Buy. Competition from other retailers and the growing number of internet-based businesses is always a concern for Best Buy. Other stores may offer similar products like that of Best Buy but Best Buy prides themselves with having knowledgeable personnel to answer technical questions that retailers like Wal-Mart or Target may not be able to provide.While big-box retailers like Sam’s Club or Costco may have similar products many consumers fail to realize two things, Best Buy does not charge its customer to shop in its stores and secondly a majority of their products happen to be lower end or discontinued models. Pressure from competitors, some that have greater market presence and financial resources could require Best Buy to reduce its prices or increase its cost of doing business.
Changes in Best Buy credit rating may limit their access to capital markets and increase their borrowing cost.Just like the U. S. has seen a changed in their credit rating Best Buy has been put on alert because of its drop of stock price over the last year from a high of $50 dollars to roughly $27-$29 dollars which it is currently trading at.
Moody’s and Standard & Poor’s have maintained their rating and outlook of Best Buy debt securities at above investment grade level, “while Fitch Ratings reaffirmed its rating at BBB+ and raised its outlook to stable”. () Fitch on the other hand reaffirmed its rating of debt securities, but revised its outlook to negative.Any future downgrades could negatively impact access to capital markets and result in higher interest costs for future financing. In the event of such downgrade Best Buy may not be able to obtain financing on favorable terms or at all.
Ratios $ Expressed In Millions Balance Sheet| 2009| 2010| 2011| Current Assets| $8,192| $10,566| $10,473| Total assets| $15,826| $18,302| $17,849| Equity| $5,156| $6,964| $7,292| | | | | Income Statement| | | | Sales| $45,015| $49,694| $50,272| Interest Income| 94| 94| 87| Net Income| $1,003| $1,317| $1,277| | | | | Current Liabilities| $8,435| $8,978| $8,663|Total Liabilities| $10,670| $11,338| $10,557| $ Expressed In Millions | 2009| 2010| 2011| ROS| 1003/45015| 1317/49694| 1277/50272| AT| 45015/15826| 49694/18302| 50272/17849| ROA| 1003/15826| 1317/18302| 1277/17849| FLM| 15826/5156| 18302/6964| 17849/7292| ROE| 1003/5156| 1317/6964| 1277/7292| Current Ratio| 8192/8435| 10,566/8,978| 10,473/8,663| Debt to Total Assets| 10670/15826| 11338/18302| 10557/17849| | 2009| 2010| 2011| DEFINITION| FORMULA| ROS| 2. 2%| 2. 7%| 2. 5%| RETURN ON SALES| NI/SALES| AT| 2. 8| 2. 7| 2.
8| ASSET TURNOVER| SALES/ASSETS| ROA| 6. 3%| 7. 2%| 7. %| RETURN ON ASSETS| NI/ASSETS| FLM| 3.
1| 2. 6| 2. 4| FINACIAL LEVERAGE| ASSETS/EQUITY| ROE| 19. 4%| 19%| 17. 5%| RETURN ON EQUITY| NI/EQUITY| CURRENT RATIO| 1.
0| 1. 2| 1. 2| | CUASS/CULIA| Debt to Total Assets| 0. 67| 0. 69| 0.
59| | TL/TA| These are the numbers for the last three year of business for Best Buy and all the numbers indicate a steady trend for Best Buy. The net profit margin seems to be slightly improving from 2009. This effect could have to do with Best Buy downsizing some of its stores and reorganizing there European and China markets in order to maximize profitability.Asset turnover remains constant even after the restructuring of the company which gives us an indication of steady management. Financial leverage has been on a steady decline as the economy finds itself in a recession so Best Buy seems to be making an effort to keep debt in line with equity. The current ratio measures a company’s ability to pay short-term debts and other current liabilities (financial obligations lasting less than one year) it does this by comparing current assets to current liabilities.
A current ratio of 1 would mean the book value of current assets is exactly the same as book value of current liabilities.Most investors look for a current ratio of 2:1 because it would mean that the company has twice as many current assets then current liabilities. With a current ratio of 1. 20 Best Buy is still liquid and is able to meet its current short term obligations and this ratio would be a lot more appealing to an investor. The debt ratio can help indicate the relative proportion of shareholders' equity and debt used to finance the company's assets.
A low debt to equity ratio shows that there is lower risk because shareholder's have claims on a larger portion of the company's assets.A high debt to equity ratio usually means that a company has been aggressive in financing growth with debt and often results in volatile earnings. Best Buy has $ 0. 59 in liabilities for every dollar in assets but this number is in decline from $0. 69 in 2010 which is a positive indicator for investors. Recommendations Best Buy delivered a solid financial performance in 2011.
Although the economic climate around this company has been difficult to overcome Best Buy has been able to remain strong through their many strategies. They must continue to expand globally to remain the electronics leader.In order to continue to expand and grow worldwide the global company needs to continue to develop and grow on the connected world concept that they have adopted as a company motto. Best Buy also needs to ensure sustainable profitable growth in global markets.
They can continue to achieve excellence and profitability through mergers, like the ones in Canada, Europe and China. They must maintain their reputation clean because it is a key component in a global market. This along with nurturing good relationships with their partners can affect the company’s financial performance.If capital spending were to increase it should remain consistent with choosing short term investments and acquisitions that will be profitable.
In order to continue success Best Buy must maintain strong controls over financial reporting. They must continue to exert rigorous oversight of the business. Best Buy will continue to provide investors with financial results that are complete, transparent, and understandable so that it can continue to do what is right to provide the most optimal results to its shareholders and the customers it renders services to.