Accounting 2014_05_20_62_bestbuy-d6694
Financial, Investment and Strategic Analysis on Best Buy

1.0 Introduction

1.1 Structure of this Report

This is a report of financial and investment analysis on Best Buy. In order to understand if Best Buy is a viable investment target, the qualitative and quantitative aspects of Best Buy will be analyzed, investigated and studied. The report is structured as follow. Firstly, the company background of Best Buy will be presented. This allows reader to understand the background relevant to the report. The macroenvironment and industry structure concerning Best Buy will be presented. Under this section, two popular and yet powerful theoretical frameworks are applied to analyzed the macroenvironment and industry structure affecting the profitability and competitive positions of Best Buy. Then, the performance, strategies and core competencies of Best Buy will also be compared to its competitors. By understanding how Best Buy performed in light of the competitive forces, better prediction can be derived concerning the future profitability and financial health of Best Buy. Then, quantitative analysis of Best Buy will be performed. Specifically, financial analysis on the company will be presented. In relation to the financial analysis, the growth strategies employed by Best Buy will be scrutinized. Then, the strengths as well as the respective weaknesses of Best Buy will be articulated. Financial ratios will be computed to understand the profitability of Best Buy. Any trends pertaining to Best Buy will also be investigated. Lastly, based on the external and internal analysis, investment recommendations are made. The past stock prices of Best Buy will be investigated and studied. Then, the share performance as well as the company fundamentals will be compared to Best Buy competitors. Relative valuation on Best Buy will be conducted. It is then argued that Best Buy is a good investment option. Nonetheless, the risk associated with the Buy recommendation will also be outlined. It is reiterated that most importantly, investors should well aware of the possibility and existence of such risks, and then to understand the risks as well as their respective risk appetite before making any investment in accordance to the recommendation provided in this report.

1.2 Best Buy: Company Background

Best Buy Co., Inc. (“Best Buy”) is a multinational retailer dealing with consumer electronics, home office products, entertainment software, appliances and related services. The company is headquartered in the United States, with operations and businesses around the various regions of the world, such as: Canada, Europe, China, Mexico and Turkey (Annual Report 2009). Currently, the company is listed in New York Stock Exchange. As disclosed in the company Form 10K, Best Buy operates retail stores; both through traditional stores and online distribution channel as well as call centers. As a holding company, Best Buy operates through several well-known brand names as follow: Best Buy, The Carphone Warehouse, Five Star. Future Shop, Geek Squad, Magnolia Audio Video, Napster, Pacific Sales, The Phone House as well as Speakeasy. Generally speaking, the value offerings of Best Buy can be approximately summarized into five categories, as follow: (a) consumer electronics, (b) home office, (c) entertainment software, (d) appliances, and (e) services and other. In Table 1.1 below, the various different value offerings, under the different categories, for Best Buy Co., Inc. are detailed.

 

table1-1

 

As of the date of this writing, Best Buy is one of the famous and largest retailers in United States. However, Best Buy is a focused retailer, whereby most of the value offerings, are designed to cater for consumers on the consumer electronics market segment. In terms of pure retail operation in the consumer electronics segment, Best Buy is indeed the largest retailer, as measured by market capitalization, in United States. However, in the retailing business, the competition is intense. Best Buy is facing great challenges from other retailers, such as Wal-Mart, as well as online stores, such as Amazon.com that does offer consumer electronics products to the consumers with cheap pricing.

2.0 Macroenvironment and Industry Structure

In this report, a top down approach will be employed to analyze Best Buy, the future outlook for the company as well as the stock prices. In this section, a review of the external environment facing Best Buy will be discussed. Firstly, PEST framework will be used to understand the potential forces or trends in the macroenvironment that will affect Best Buy. Then, the industry structure concerning Best Buy, or more specifically, focusing on the consumer electronics segment will be presented. Later, the competitors of Best Buy will be outlined and analyzed.

2.1 PEST Analysis

In this section, an analysis on macro environment that Best Buy is operating in will be presented. PEST model will be used. Specifically, political, economic, social-cultural, and technological issues will be discussed.

Political factors. In Europe, the main challenge to Best Buy is due to the government apparent strong commitment to austerity program. In order to reduce budget deficit, government in Europe region, whereby government of United Kingdom included, are implementing strict fiscal policies. Government spending are being cut down aggressively, and it is even expected government subsidies over the public may be cut down as well (Creel et. al., 2009). Overall, this is likely to dampen the already weak economy. When government spending is reduced, the economy growth rates tend to slow down – job are created less, and unemployment may increase as a result (Aaronson et. al., 2010). Then, another similar risk factor in Europe region is concern over sovereign debt crisis. Should the sovereign debt issues cannot be solved properly, the region run a high risks of falling back into double dips recession, which will then affect the other countries in the region (MacGuineas, 2010).

Economic factors. Consumer sentiment remains fragile. As reported by Phelps (2011), it is stated that shopping patterns of consumers remain cautious. It is noted that consumers are staying away from spending on big ticket items, such as televisions. Indeed, it is unfortunate that the consumer electronics segment is the most cyclical and hardest hit in the retailing industry. According to Gordon (2011), the situation is gloomy in United Kingdom and Europe. It is asserted that consumers has been cutting down spending on discretionary items, such as big ticket items and expensive electronics items, in face of the government austerity commitments, worries on their job securities,  as well as rising inflation around the world. Indeed, the situation is getting worst, as United States is trying to export the economic problems to the rest of the world, through quantitative easing or continuously relying on issuance of debt for financial stability of the nation (Kirby, 2011). Indeed, it is reasonable to expect that a situation of hyperinflation will set in as the Federal Reserve attempt to get out from the crisis through printing money (Rowley, 2011).

On the other hand, the economic outlook in the east looks more promising. Instead of being haunted with weak consumer sentiment, high unemployment and restrictionary fiscal policies by government; countries such as China, India, and other emerging countries are experiencing a long run booming in the economy. There are talks that the future economic growth will primarily contributed by those emerging nations in the East (Teh, 2011). Many multinational corporations had already expanded to the region. Apparently, Best Buy is well position to be benefited by the expected long economic boom in the region.

Overall, it is hard to predict accurately the dynamics between the various economic forces, but it is certain that the economic outlook will be turbulent (Roubini, 2010), and hence, creating tremendous pressures and  challenges to global retailer such as Best Buy, particularly when the company is having revenue generation mainly from the western countries.

Social-cultural factors. The social and cultural changes are evolving fast in the recent years, due to globalization effects. Overall, the world is becoming more integrated. These are signs that people around the world are getting more acceptances towards western values. Particularly in the emerging countries, such as China; people are getting more materialistic and individualistic (Jacobsen et. al., 2010). Consistent with the rising living of standard, people enjoy higher disposable income, and is indeed getting more demanding. Today, consumers have higher expectations, which could be harder to fulfill. Excellent product quality as well as good services provided to the consumers is becoming the minimum standard for businesses to compete in the dynamic and ever challenging world (Kumar, 2005). Indeed, extraordinary customer services and customer satisfaction are becoming the key competitive advantage of any businesses. Pricing may no longer the sole considerations of consumers, as consumers simply want to feel to be touched and persuaded to buy from any organization (Arnold, 2002). Overall, Best Buy is getting the trend right, as the company is adopting a customer centric philosophy to compete in the challenging retailing industry.

From another perspective, the public are getting more educated and concerns on the needs of environmental protection and preservation. Such awareness is driving the marketplace, whereby corporations are expected to adopt and exercise Corporate Social Responsibilities activities for better world. Specifically, corporations are expected to act ethically, and to seriously take the community interest into consideration, instead of chasing over short term profits in the marketplace (Enderle, 2010). There are studies found that consumers are having better perceptions on those companies that adopt sustainable and responsible development model, and are managing the company from a stakeholder perspective. Over the long term, these companies command greater respect from the consumers (Albino et. al., 2009).

Technological factors. Technology and innovation is increasing become the key driving forces affecting the competitive landscape around the globe. This is true in the retailing industry as well. The rise of information technology, as well as the proliferation of internet technology, has been changing the marketplace. As more people have access to internet, the world had essentially entered into an information era (Dunkel, 2009). For example, consumers are getting more used to purchasing things online (Siddiqui et. al., 2003). Not only that, internet has also been affecting the pricing power of businesses, as consumers can easily compare prices online and then make more logical decisions based on their research results obtained online (Cetron et. al., 2008). One the positive side however, the rise of information technology enable companies to become more efficient, and to lower the cost structure of the respective company. Then, proliferation of internet also allows alert and agile corporations to tap into the rising opportunities of internet marketing, to reach a larger pool of prospect customer worldwide. Indeed, there are a lot of opportunities offered by internet marketing, whereby companies can now keep better and closer relationships with their customers. Customer relationship management is becoming increasingly important to company’s future performance in the future (Cheng, 2009).

2.2 Porter Five Forces

Understanding on the industry structure and the relevant competitive forces affecting the industry using five forces framework is important to form better judgment on the attractiveness of the potential profitability of the industry.

Rivalry among existing competitors. Generally, the retailing industry, particularly in the consumer electronics segment in United States, can be divided into two broad categories, namely: (a) brick-and-mortar and (b) online stores. Currently, in the consumer electronics segment, Best Buy is still the market leader, commanding a lion shares of 26.1%, followed by Wal-Mart, with 11.7% and then by Aamazon.com (Smith & Wolf, 2011). The rivalry among existing competitors is intense, painting unfavorable picture for Best Buy. As discussed by Jannarone (2011), the intensifying pricing competition had caused Best Buy to suffer from eroding profit margin. The situation becomes worse when consumers are found to compare the pricing of consumer electronics products online. Overall, the rivalry among existing competitors is intense, and this has been creating huge challenge for Best Buy, to maintain its profit margin while compete with other rivals through a more competitive pricing offered to customers.

Bargaining power of buyers. In the competitive business environment, buyers have high bargaining power against retailer, such as Best Buy as they have many choices or options to purchase from. Besides, there are essentially no switching costs for buyer to simply buy from another retailer. Such a situation is unfavorable to Best Buy, as it will likely to reduce the profit margin of Best Buy when competitions between rivalries intensify. Buyers however, enjoy great value offerings and much affordable products from the price competition between the sellers.

Bargaining power of suppliers. The bargaining power of suppliers of Best Buy is moderate. There are a few larger suppliers that supply essential and highly demanded products to Best Buy. Indeed, as disclosed by Best Buy’s Form 10K (2010), one of the key risk faced by the company is that it is heavily dependent on few suppliers for the merchandize the company is purchasing. To be exact, it is informed that the company’s 20 biggest suppliers accounted for about 60% of the merchandizes that the company is purchasing. This indicates that profitability of Best Buy will be affected if the relationships with suppliers are broken.

Threats of substitute products. Best Buy is having a large product portfolio; there is little risk that the rise of any single substitute products to the existing products sold by the company will affect the company materially. Indeed, Best Buy is thriving by offering the customers all sorts of products, from end to end, in the consumer electronics segment.  As such, the threats of substitute products should not be a great concern that could affect Best Buy in the future.

Threats of new entrants. Giving the already competitive and cut-throat competition, any new entrant will likely be deterred. Indeed, it is hard for new entrants to survive, without breakthrough in value proposition or distinctive competitive advantage in the marketplace. The already established industry players, however, enjoy certain economies of scale, which will enable them to compete on low cost structure and hence, low pricing in the highly competitive marketplace. As such, the threat of new entrants would be unlikely, given the already competitive industry structure.

2.3 A Comparison of Best Buy to Competitors

As discussed above, the retailing industry, particularly in the consumer electronics segment, is a highly competitive one. In United States alone, there are many retailers dealing with consumer electronics products offerings to the marketplace. As shown in Table 2.1 below, there are many listed and private corporations serving the US market. While the exact value offerings of these companies may differ, the various industry players are indeed competing over the same customers. Many of the products offerings by these companies are overlapping, and hence, customers have many choices to choose from. As shown below, among the listed companies in the retailing industry include: Best Buy Co. Inc., Wal-Mart Stores Inc., Dell Inc., RadioShack Corp., Target Corp., Costco Wholesale Corporation, Lowe’s Companies Inc., The Home Depot, Inc., and hhgregg, Inc.

 

table2-1

 

In table 2.2 below, the four largest retailers, serving and deriving the revenue partly or primarily from the consumer electronics segment are presented. All of these competitors are indeed well-known corporations around the world. The biggest competitor, as measured by market capitalization, as the time of this writing, is Apple Inc. Apple is famous of the revolutionary and cutting edge products such as iPhones, iPads and iPads. In the recent months, Apple products have been popular among the public. Innovation and creativity have been the strengths of Apple. Then, Wal-Mart is the established and successful corporations around the world since decades ago. Among the competitors, Wal-Mart is the company achieving the highest revenue. Apart from that, Amazon.com is yet another fast growing upcoming challenger in the consumer electronics segment. The business model of Amazon.com is outstanding, taking over the market shares of other brick-and-mortar retailers, such as Best Buy in the recent years. As shown in Table 2.2 below, the price-to-earnings ratio for Amazon.com is tremendously high, indicating that investors are having high hopes and expectations on the company.

 

table2-2

 

In a nutshell, a review of the external environment of Best Buy found that the external environment facing the company is not encouraging. Specifically, the economy outlook in the western countries, such as in United States, Europe regions, Canada and United kingdom is uncertain and gloomy. Due to sovereign debt crises as well as pressures on governments on these countries to adopt strict fiscal policies, consumers’ sentiments are weak and the economy growth rate is expected to be dampened.  Considering a large portion of the revenue of Best Buy is derived from these region, to main current level of profitability is indeed challenging for the firm. The economic outlook on the east looks more promising. Fortunately, Best Buy is having some strong presence in China and other emerging countries. Over the long run, Best Buy financial performance may be more dependent on its performance in the east. Then, a discussion on the industry structure of the consumer electronics retailing industry is also articulated. Many of the competitive forces pertaining to the consumer electronics retailing industry are unfavorable to the profitability of Best Buy. Of particularly serious is the intense and cut-throat competition within the industry players. The highly intense competition will likely to pose tremendous challenge for best Buy to continuously expanding and growing its business, while maintaining its profit margin despite having to cut down selling prices in the marketplace. Then, a review of the main competitors is also performed. Best Buy is one of the largest retailers in the consumer electronics segment in United States. However, the competitors of Best Buy are also reputable and are having respectable track records of growth, success and financial performance. In such an industry, to growth and expand in a sustainable manner profitably will be a true test of the competencies of the management team in Best Buy.

3.0 Financial Analysis of Company

Having discussed the external environment of Best Buy, an in-depth analysis on the strategies as well as financial positions of Best Buy will be outlined in this section. Firstly, the strategies adopted by Best Buy will be reviewed. Then, the weaknesses and strengths of Best Buy will be articulated. Having understood the strategic direction and core competencies of the company, financial analysis will be perform on the company, to further analyze the financial results achieved by the firm in the past. The trends pertaining to the financial performance of Best Buy will be analyzed and employed to form better judgment on the management competency, expectations on future profitability as well as the business nature. All of these issues will then be considered in forming more valid and accurate expectation and inputs towards valuation of the firm.

3.1 Best Buy Growth History and Corporate Strategy

In this section, the growth strategy of Best Buy, both from a historical perspective, as well as from information gathered via management communications recently, will be presented. This is important as effective and viable strategies are crucial to sustainable and outstanding financial performance for the company in the future. Besides, a review of the company strategies and the future strategic direction will allow analysts to form better picture in prediction or estimation of the company profitability in the long run.

According to the company disclosures in Form 10K, dated 2010, the company is committed to growth as well as innovation. The company is adopting a customer centric philosophy – and is determined to treat customers as unique individuals. To achieve that, the company strategy is to engage and to motivate the employees to serve and meet the needs and requirements of customers though end-to-end solutions. According to the management, it is believed that the company is actually offering consumers various benefits through “store environment, multi-channel shopping product value, product selection, and a variety of in-store and in-home services related to the merchandize” the company are offering (Best Buy’s Form 10K, 2010). Nonetheless, there are much more strategies being adopted by the company to grow and expand in the competitive business environment. These strategies will be outlined in the following paragraphs.

International expansion. Facing intense competition in United States, Best Buy has been relying on expansion to the international context for further growth and profitability. For example, in 2003, Best Buy launched the Best Buy brand in Canada. Then, in 2007, the company expanded to China through acquisition of Jiangsu Five Star Appliance Co., Ltd. In 2009, Best Buy expanded to both Europe and Canada. Following that, as recently, in 2010, Best Buy expanded to Turkey (Best Buy’s Form 10k, 2010). As articulated above, to expand to the international context is rational and viable strategic direction of Best Buy. It is understood that the economic outlook in countries located in the Europe region as well as in the North America is largely uncertain and challenging. In contrast, the economic outlook on the east looks more promising. As such, it is reasonable to expect that the management will increasingly dependent on international expansion to maintain the company growth rate as well as to tap into the opportunities arise from these emerging countries on the east.

Growth through exclusive brand name. Besides, Best Buy is also trying to enhance the company profitability through the company exclusive brand. The management of Best Buy asserted that the group is having a global sourcing office in China, which is specially established to design, develop, test and purchase the products to be marketed under Best Buy exclusive brand from countries in Asia. Such a strategy is expected to enhance the profit margin of the company, as the products purchase through such strategy is generally lower in costs, as compared to buying branded products from the more established and reputable manufacturers. Indeed, in the long run in the future, the management is expecting that products marketed through Best Buy’s exclusive brand name will increasingly contribute to revenue.

Growth through stores development. In the recent years, Best Buy has been growing fast through aggressive new stores opening. The company has been concentrating stores development in the new market, especially in the international context. In the domestic context (i.e., in United States), the company is focusing on relocating, remodeling as well as enlarging existing stores for tactical objectives (Best Buy’s Form 10K, 2010). Indeed, one of the areas the many retailers are competing with each other is to secure suitable locations for their businesses. Best Buy apparently has been able to secure good locations to open new stores to attract crowds and potential customers.

            Focus on higher margin segment with brighter prospects. Going forward, Best Buy management is of the opinion that the company will be able to grow through focusing on those business segments that the competition is less intense and have brighter growth prospects. For example, it is expected that e-commerce will contribute a double digit growth to the company; while e-reader as well as wireless revenue may be able to achieve triple digit growth for the firm (Wolf, 2011). Indeed, one of the strategies is to enhance Best Buy presence online. Such a strategy will be detailed further in paragraph below.

            A stronger focus on online stores and presence – to close the competitive gaps between Best Buy and Amazon.com. In April 2011, Best Buy had outlined a new strategic direction, which is to focus more fully on establishing a fully spate of online, in-store and merchandizing initiatives (Wolf, 2011). This is sensible, considering that the market shares of the firm is greatly eroded by aggressive competitors such as Amazon.com. As such, Best Buy will focus on e-commerce, and to delivering the ease and attractiveness of online shopping and stores for price conscious customers, to battle against the rise of Amazon.com. As discussed by Best Buy CEO, Brian Dunn, Best Buy is making good progress in closing down the competitive gap between Amazon.com and Best Buy. Indeed, internet business and to drive online sales, which is to be supported by the existing brick-and-mortar stores, are the main strategic move of Best Buy to tackle the heated competition from Amazon.com (Jarzemsky, 2011). As a proof that opening of online stores is a correct strategic move, the revenue contribution from online stores has been contributing more to the firm’s financial performance. Specifically, as reported by Buchta & Phelps (2011), Best Buy was able to achieved a double digit growth from online stores, in the most recent quarter in 2011.

            Downsizing physical space. In today fast changing business environment, Best Buy is fast to realize that big is not always better – and to downsize its physical space is a useful way to make the operations efficient and low-cost. For this, Best Buy is also aiming to wall-off some of its sprawling stores by sub-leasing  more space to other smaller retailers, such as to grocers, stores dealing with beauty supplies, as well as outlets dealing with home furnishing stuffs (Royal, 2011). Instead, the focus will be concentrated on having more online presence to reach the consumers in a more cost effective manner. In short, Best Buy’s strategy in the near future is to reduce the square footage of the brick-and-mortar stores, while at the similar time, trying to enhance the firm’s point of presence. On the other hand, while reducing the physical big-box stores in the large cities, Best Buy will channel its focus to opening smaller stores in smaller location around United States, to reach a larger pool of  customer (Currin, 2011).

            In a nutshell – adoption of a multi-channel strategy. Overall, Best Buy is banking on its multi-channel strategy to differentiate itself from the competitors and to grow the company in the future. There are many opportunities to be tapped on and leveraged by Best Buy, on its combinations of physical and digital assets. The combination of both online and off-line shopping channels, enable the company to reach and contact with the customers through a multichannel manner. More specifically, the multichannel available to the company include: big-box stores, small footprint stores, e-commerce channel (i.e., web portal), mobile page, digital context delivery, call centers, and other in-home and in-stores services. Besides, the company is also focusing on growing the online business, as a strategy to prevent Amazon.com from continuously taking away the market shares through cheaper pricing offered to online customers, while at the same time to reach the customers in different manner. According to the CEO of the group, Brian Dunn, Best Buy is committed to double the revenue generated from online business in the next three or five years. Then, the company will be banking on the growth and profitability by targeting those segment that offer them the opportunities from market demands such as new products innovation (example, tablets computers, such as iPads) and networking. Last but not least, Best Buy is also focusing on categories that the firm has significant advantage, such as in the appliances and gaming category. In the international context, opening of new stores in China is also expected to contribute to the firm profitability in the future. In short, there are various strategies formulated and being implemented to sharpen the competitive advantage of the company, while to tap into opportunities and areas that offer growth prospects to the firm.

3.2 Strengths and Weaknesses of Best Buy

Having discussed the strategies adopted and implemented by Best Buy, this section will discuss the strengths and weaknesses of the firm. This is important as it allow us to estimate the relative position of the company in the competitive marketplace, after considering the influences from various external factors as articulated in the sections earlier. In the following paragraphs, the strengths of Best Buy will be discussed. Among the strengths of positive factors that will contribute to positive financial results for Best Buy or to add strengths to the stock prices of the company in the future include: (a) exposure of Best Buy in China, (b) share repurchase, (c) availability of insider buying, as well as (d) adoption of business ethics by the company.

            Best Buy’s exposure and growing profitability in China. One of the encouraging news about Best Buy is that the firm is having bright international picture, primarily driven by its Five Star businesses in China. For example, in the recent quarter, the performance of Best Buy in the international context had been largely boosted by the operations in China.  Specifically, as reported by Buchta & Phelps (2011), Best Buy’s Five Star chain able to achieved a comparable store sales improvement of 9% in China (whereas the same stores sales of Best Buy declined in the Canada and Europe region).

            Repurchase of Shares. Recently, Best Buy had just announced that the company is committed to a share repurchase plan of $5 billion of shares. As reported by Phelps (2011), Best Buy CEO, namely, Brian Dunn is committed to utilize the free cash flow generated from the business operations in a disciplined manner. Share repurchase is a sensible choice. This should be bullish news, considering that a total of $5 billion share buyback program will enable the firm to purchase a total of 40% of the company’s shares (Jannarone, 2011). Overall, it is reasonable to conclude that the announcement of share repurchase essentially indicates a more shareholder friendly policy.

            Insider buying. Aside from the share repurchase program, there are positive sign on Best Buy as the chairman as well as the founder – Richard Schulze has been buying the shares of the company in December 2010. As reported by Hodson (2011), the chairman had acquired a total of 585,000 shares of Best Buy valued at $14.4 million. According to observation of Hodson (2011), the founder is known for buying into weakest and selling for strength – essentially, buying low and selling high. Besides, the founder is also having a long term perspective – despite risks of losing in the short run. The act of buying Best Buy by the knowledgeable insider, for this instance, suggests that the stock of Best Buy is perhaps undervalued and deserved the attentions of long term investors.

            Ethical company. It is definitely comforting for investors to realize that Best Buy is a company emphasizing on business ethics and practices. Indeed, it is announced that Best Buy was one of the 110 companies to be awarded as the ‘World’s most Ethical Companies’ around the world (Gelinas, 2011). Accordingly, Best Buy was awarded because of its long history of environmental responsibilities. Being awarded such award will definitely put Best Buy on the radar screen of socially responsible investors. Overall, this should be a positive news and factors towards the stock prices of the companies. Besides, being awarded as one of the ‘World’s most Ethical Companies’ also provide more confidence to investors that the company is indeed likely to have better ethical business practices, and hence, stronger corporate governance structure.

It is however, acknowledged that Best Buy is suffering from several issues that could affect its profitability in the future. Indeed, some of these issues, if left unsettled or attended properly, will affect the strategic position of Best Buy in the competitive business landscape. All of these factors could potentially affect the profitability of Best Buy, or to put downwards pressure on the stock prices of Best Buy is they persist to haunting Best Buy in the future.

Deteriorating customer services. In the ever competitive retailing industry, the competition within industry players had largely force the various retailers to become more efficient – to lower the cost structure of the respective firm as well as to maintain the already low profit margin. The side effect of excessively concentrating on efficiencies is that management will tend to neglect the importance of superior customer services. In an independent survey conducted by Consumer Reports, it is found that the worst customer services belong to Wal-Mart. Although the ranking of customer services provided by Best Buy is not explicitly cited as among the worst performers, it is pointed that customer services by Best Buy is not truly outstanding, as there are cases of unsatisfied customers complaining on the level of attention and services provided by Best Buy to the consumers (Salisbury, 2011). This is the area that could affect Best Buy profitability and reputation, if the management never looks into the matter seriously.

Upcoming challenger – Amazon.com. As discussed by Smith and Wolf (2011), Amazon.com, the famous, fast growing and highly aggressive Amazon.com, is growing larger towards the fourth position in United States, just behind Best Buy, Wal-Mart and Apple, despite it is a relatively young company in the industry. The business strategies of Amazon.com are largely contributing to the success of the company. Unfortunately, the success of Amazon.com largely contributed by the ability of Amazon.com to take over market share from the traditional brick-and-mortar retailer such as Best Buy and Wal-Mart. Due to the lower price offered by Amazon.com (largely thanks to the lower cost structure from operating an online stores), the firm able to lure away many customers of Best Buy and Wal-Mart. Essentially, many customers will visit Best Buy and Wal-Mart, to view, test and try out the products in the stores, but end up buying online through Amazon.com due to cheaper pricing. Obviously, Amazon able to utilize Best Buy stores as their show houses, and yet, maintaining the low costs structure of the firm by operating online. It can be concluded that the strategies of Amazon.com is highly effective against taking away customers from the traditional brick-and-mortar retailers; worst, particularly at the expenses of these traditional retailers.

            Best Buy’s long term Issuer Default Rating (IDR) being downgraded by Fitch from BBB+ to BBB-. One of the negative events happening that put downward pressure towards Best Buy’s stock prices is that Best Buy’s IDR is being downgraded by Fitch Ratings. The downgrade is associated with the amplifying risks facing the business profile of Best Buy. According to Fitch, the downgrade is justified as the company is losing market shares, primarily to more aggressive competitors such as Amazon.com. Worst, the revenue of Best Buy has not been able to keep up with the pace of overall sales of consumer electronics and appliances in United States. Indeed, the industry is becoming more competitive, as Best Buy is facing great challenges from both its brick-and-mortar as well as online channels. Nevertheless, Fitch Ratings maintained that the business outlook of Best Buy should be stable, as the company abilities to generate free cash flow in the near term is unlikely to be affected significantly. As such, Best Buy’s IDR is still rated in the rank of investment grade (Business Wire, 2011).

Higher transportation costs and temporary disruptions in supply chain. One of the adverse trends affecting the profitability of Best Buy is the rising transportation charges – due to higher oil prices. Giving the fact that Best Buy is already operating in a cut-throat and thinning margin industry, the rise of transportation costs is severe enough to affect the profitability of the firm significantly (Gruenwedel, 2011). From another perspective, Best Buy supply chain had been disrupted by the recent earthquake and tsunami in Japan (Jarzemsky, 2011). Specifically, the digital imaging products are affected, due to shortage of supplies. Nonetheless, this should be an extraordinary and infrequent event, and the adverse impacts from Japan tsunami and earthquake should be short lived.

Lower efficiencies – lower annual retail sales per square foot. One of the useful measure of the stores efficiencies and the effectiveness of store utilization among retailer is through the number of annual retail sales per square foot. However, the annual retail sales per square foot for Best Buy are hardly promising, when compared to the more successful retailers such as Apple stores. According to Kane & Sherr (2011), the annual retail sales per square foot for Apple are $4406, the highest in the retailing industry. In contrast, the annual retail sales per square foot for Best Buy are only $880. This indicates that Best Buy performance is indeed unsatisfactory. Comparing to the best retailers, there are much to be improved further.

Considering all of the negative issues, apparently, it is reasonable to mention that the future of Best Buy is hardly predictable. To stay relevant and competitive in the highly competitive industry is nothing easy. Although many measures are being implemented, the situation is unclear. Indeed, as how it put by Jarzemsky (2011), Best Buy is still not out from the wood yet. Perhaps this is one of the reason contributing to weaknesses in the share prices. Investors might be more comfortable to adopt a wait-and-see approach. Nonetheless, there are also positive factors that indicate Best Buy could be a good investment. At this moment, no prudent investment decision can be made. An analysis of Best Buy financial statements will provide more information relevant to the investment decision making process and company valuation for Best Buy under such a competitive business landscape and turbulent economic environment.

3.3 Overview of Financial Information of Best Buy

The three years balance sheet for Best Buy is shown in table 3.1 below. A fast review of the balance sheet indicates that Best Buy had indeed just recovered from the recent financial crises and economic recession in year 2009. Best Buy’s solvency and liquidity position is generally healthy, considering that the current assets exceed the amount of current liabilities in the period under investigation. However, a fast review of the items under current assets for Best Buy indicates that account receivable for the company is increasing steadily. This could be an unhealthy sign, as it suggests that the management is having looser cash collection policy. Then, a review of the items fall under long term assets indicates that these items have relatively stable amount. Specifically, long term investments of the company fall under the range of USD 350 million; property, plant and equipment under the range of USD 4 billion; goodwill around the range of USD 2.4 billion; and intangible assets valued under the range of USD350 million to 400 million. Similarly, a review of the items under current liabilities for the company suggests that the item under current liabilities for Best Buy is relatively stable under the period being studied. That is similar for those items under long term liabilities. Except a slight decreasing trend for long term debt employed by the company, the amount of other liabilities and minority interest are relatively constant. Fortunately, the total shareholder equity for Best Buy from 2009 to 2010 looks more promising, as the company shareholder equity is found to be increasing steadily over the period. Especially for the retained earnings of Best Buy, there is an obvious increasing trend under the period being studied. This indicates that the company indeed is profitable and having stable financial track record in the past. As the many items in the balance sheet are found to be stable, it can be concluded reasonably well that the company is indeed a roughly prudently managed firm. Indeed, considering the business nature of Best Buy, the stability and relatively little changes on the financial information shown in the balance sheet below is logical. This reveals that the company is indeed pretty diversified, both from product portfolio and geographically diversification perspective.

 

table3-1

 

In Table 3.2 below, the income statement of Best Buy from 2009 to 2011 is presented. Overall, the income statement of the company is pretty encouraging. Revenue of Best Buy has been increasing steadily from USD 45 billion in 2009 to USD 50 billion in 2011. To be exact, that represents approximately 11% improvement in revenue of the company in a period of two years. Similarly, the gross profit achieved by Best Buy is also increasing over the two years, from USD 10 billion in 2009 to a total of USD 12 billion in 2011. This is an improvement of 20% in two years. However, the operating income, after gross profit adjusted for R&D expenses, selling and general administrative expenses as well as non recurring expenses, indicate lesser improvement over the period being studied. The operating income for Best Buy over the year is: USD 1.8 billion in 2009; USD 2.2 billion in 2010; and USD 2.1 billion in 2011. In a similar manner, the net income of Best Buy is also on a rising trend. The net income achieved by Best Buy is USD 1 billion in 2009; USD 1.32 billion in 2010; and lastly, USD 1.28 billion in 2011. This is actually an improvement of 20% in net income over a period of two years. Overall, the income statement reveals that Best Buy is indeed a profitable company. Although the improvement of the business, from revenue and income perspective, is not truly outstanding, the financial performance is marginally satisfactory. The improvement of profitability of Best Buy, however, can be logically and reasonably attributed to recovery of economy in United States as well as the rest of the world, after the serious crisis in year 2009.

 

table3-2

 

Overall, a review of the financial statements of Best Buy suggests that the company is performing satisfactorily over the past three years. Such a performance can be contributed by the recovery process after the financial crisis and economic recession in year 2009. As such, the improvement of Best Buy profitability is indeed can be associated with the positive changes in the external business environment. There is however, no obvious sign or indication that the profitability of the company outperformed the recovery of economy in the western countries. It can then be generalized that Best Buy is indeed a stable company, probably due to its larger size (i.e., economies of scale) and a highly diversified products portfolio and business bases geographically. Purely from the profitability perspective, the company performance, however, may not invoke huge interest from investors, as there is little indication that something big or highly positive is going to happen to the company in the near future, from a review of the financial performance of the firm in during the past three years. In order to form better prediction on the performance of Best Buy in the future, a more detailed analysis on the company will be performed in the following section.

3.4 Trends Analysis of Best Buy

In this section, analysis of Best Buy financial statement will extend beyond simple analysis on balance sheet and income statement of the firm. In Table 3.3 below, the financial performance of Best Buy’s operations in the domestic country, namely, United State is presented. The financial performance of Best Buy in the domestic country is not truly encouraging, where the improvement of the revenue, comparable stores sales gain, gross profit, and operating income is within single digit growth rate. For example, the operating income of Best Buy has minor improvement ranging more 5% to 6% in the past three years. Such a financial performance is actually nothing to be envy or respected about. Indeed, perhaps one of the positive financial information discovered is that despite operating in a highly competitive industry, Best Buy still able to record a gross profit margin of approximately 35% in United State. Overall, the company profitability outlook in United States is not truly encouraging. Unless the stock is trading at a significantly undervalued price, the company cannot be justified as a highly investment option for investors.

 

table3-3

 

Table 3.4 below however shows the financial performance of Best Buy in the international context. Generally speaking, the revenue generated from the international operations is encouraging, recording revenue improvement of 36.5% in year 2008, 48.6% in year 2009 and 24.5% in year 2010. However, the comparable stores sales performance is mixed, whereby although the company is achieving an improvement of 9% in year 2008 for comparable store sales, the comparable store sales for year 2009 is a negative 0.9% while a negative 3.7% in 2010. Nevertheless, the gross profit margin for Best Buy in the international market is increasing in the recent years, from 20.7% to 25.3% in 2010. Overall, although Best Buy operations in the international market is expanding, judging from the revenue perspective, the operating income generated from the international operations is not truly encouraging, primarily due to the increase of selling and general administrative expenses for Best Buy in these markets.

 

table3-4

 

In Table 3.5 below, the revenue contribution breakdown according to countries are presented. Overall, it can be observed that a large portion of the revenue is generated from operations in United State, followed by the operations in Europe and Canada. The revenue contribution from operations from China as well as other region, however, is minimal at the current stage.  Similarly, log lives assets is highest in United State, followed by in Europe and Canada. Overall, this suggests that Best Buy is a company highly concentrated in the Western countries. As discussed before, the gloomy and uncertain economy outlook in Europe and North America region is putting great pressure towards businesses in the region to maintain the profitability level. As such, the financial performance of Best Buy is indeed worrying.

 

table3-5

 

In Table 3.6 below, the revenue contribution from different categories of products offered by Best Buy is presented. Overall, the three key products categories contributing significantly to revenue of Best Buy include the following: (a) consumer electronics, (b) home office, and (c) entertainment software. However, in both the domestic and international context, the revenue contributed by consumer electronics segment is decreasing over the years, from 2008 to 2010. This is similar to the revenue contributed by entertainment software in both the domestic and international market. In contrast, the revenue contributed from sales of home office related products has been increasing. Similarly, the revenue contributed trough provision of services to customers in the international market has been increasing. These are consistent with management assertion and strategies to focus more on product categories that offer brighter prospect with greater demand. Overall, from a historically perspective, Best Buy is slowly transforming into a one stop solution in provision of both products and services related to consumer electronics to customers.

 

table3-6

 

In Table 3.7 below, the important financial information pertaining to Best Buy is summarized. In order to capture a clearer picture of the company performance from a longer historical perspective, the data of the company from year 2006 to 2010 is presented. Overall, it can be observed that the revenue of the company has been increasing steadily from year 2006 to 2008, despite global economic recession in year 2009. However, the revenue improvement did not translate into operating income or net income improvement for the firm. For example, the net income of Best Buy from year 2006 to 2010 has been ranging around USD 1.003 billion to USD 1.407 billion. The net income of Best Buy is lowest in year 2009, caused by the Great Recession in the particular year. Similarly, the net earnings per share of the company are ranging from USD 2.27 per share to USD 3.12 per share. The relative stable, but no-growth performance of Best Buy is fully captured in the performance of earnings per share data. Nonetheless, the dividend amount paid to shareholders has been increasing steadily throughout the years. This suggests that Best Buy is increasingly raising the dividend payout ratio over the time period under researched. This could mean that the company is adopting a more shareholder friendly dividend payment policy. However, from a more pessimistic perspective, the increasing payout ratio may suggest that the company has little growth opportunities in the marketplace – at least, such a situation are perceived by the management in Best Buy.

Besides, over the long run, the gross profit margin of the company is relatively stable, approximately around a range of 25%. The expenses due to selling and general administrative expense are also relatively constant, at approximately ranging from 19% to 20%. Both of the ratios suggest that the company operation and business model is relatively resilient despite volatile economic climate round the world, especially in financial year 2008 to 2010. From an optimistic perspective, this indicate that the company performance could be easily predicted, as compare to other high-tech or more volatile and dynamic business model or venture in the more fast changing industry.

From another perspective, it is obvious that the total assets of the company are increasing in these years. The shareholder equity has been increasing steadily as well. However, the increase of debt in these years is obviously at a faster rate. The debt amount had more than tripled from approximately USD 600 million in 2006, to USD 1.8 billion in 2010. Consistent with that, the total stores, as well as total retail square footage has been increasing over the years. Obviously, Best Buy has been growing to a larger size. This is good news, but the growth in size of the company is not accompanied by the improved profitability of Best Buy, from the operating income and earnings per share perspectives. Purely under the period under investigation, this indicates that the expansion of business operations in these years had not yield any significant economically meaningful and justifiable returns. However, it may be premature to conclude that the expansion of Best Buy may not bring benefits or advantages to the company over the long run, as often, adoption of certain strategies may yield fruitful results over the long run, although the strategies seemingly ineffective in the short term. At the time of this writing, the only conclusive statement can be made is that the company is growing bigger in size, but has not yet yielding significant or proportionate improvement in earning per shares.

 

table3-7

 

In Chart 3.8 below, the stock prices performance of Best Buy is compared to the industry average as well as the stock index of S&P500. Overall, the performance of Best Buy is on par with the industry average as well as S&P500 stock index (with slight up performance in year 2006 while down performance in year 2010). Indeed, this suggests that Best Buy could be a roughly good proxy of S&P500 and the retailing industry. Such findings is consistent with the findings articulated above, whereby the growth rate of Best Buy and the company financial performance is in line with the economy growth of United States and other countries in Europe. On the positive side, this suggests that Best Buy could be a relatively stable company to invest in. However, on the negative side, Best Buy will likely to offer little growth opportunities or capital appreciation potentials to investors seeking high returns.

 

chart3-8

 

4.0 Investment Recommendations

In this section, investment recommendation pertaining to Best Buy’s stock will be presented. To perform that, the stock prices of Best Buy will firstly be analyzed and investigated. Then a relative comparison of Best Buy Stock to the competitors will be performed. A comparison of Best Buy’s attractiveness as investment target to the competitors’ attractiveness as investment target will inform the investors on the prospect of Best Buy stock performance in the long run. Then, earnings forecast of Best Buy will be performed, through Discounted Cash Flow (DCF) method. Fair value of Best Buy will be derived. After these processes, the reasons of recommending Best Buy as a viable and potential investment will be articulated. Lastly, the risk associated with investing in Best Buy will also be outlined. Uncertainty or the occurrence of these risks will likely affect the accuracy and prediction of investment recommendation presented in this report.

4.1 Stock Prices and Performance of Best Buy

Figure 4.1 below shows the stock prices of Best Buy for the past five years. It is shown that the sock prices achieved a peak in year 2007, and then suffered badly during the Great Recession era during year 2008 to year 2009. Prior to the financial crises, Best Buy is trading at a range, in a slightly downward sloping manner. However, prior to year 2009, the stock prices plummeted sharply due to fears over the collapse of United States economy and the impacts to the world market. It is worthy to understand that such a situation is not limited to Best Buy, whereby the share prices of other companies had recorded similar serious drop in share prices as well. However, in the early of the year 2009, the share prices of Best Buy recovered sharply, rising more than 100% before 2010. On hindsight, it is found that investors perhaps had overreacted to the gloomy economic environment, and the fear of the collapse of the economy is not justified. Considering the fact obtained from previous analysis presented in section above, it is found that the fundamental of Best Buy, indeed is unchanged and stable. As such, it can be commented that investors’ pessimism had caused serious undervaluation of Best Buy during the market panic in year 2008 and 2009.

In the post crisis era, Best Buy shares have been trading in a range as well. The share prices are volatile, and it is indeed fail to recover from the peak in year 2007. Then, in mid 2011, it is found that the stock prices plummeted again. As discussed in the sections earlier, such as situation is due to investors’ perceptions on the gloomy economic environment in United States as well as in Europe. Unemployment rate remains high, and consumer confidence level is weak. In the Europe region, sovereign debt crisis is threatening the stability of the already fragile and weakening economic situation.

Nonetheless, it is perceived that history will repeat itself, and the sharp drop in share prices, recently, is hardly justified. History tends to repeat itself, although it may do so in a different rhythm. Again, the fears and pessimisms of investors are contributing largely to the sharp drop of Best Buy share prices. It is known and understood from the previous analysis that the business of Best Buy is a relatively stable one. Although weak economy will likely to affect the firm’s performance adversely, the impacts may not be as serious as investors thought or perceived. Thus, the sharp drop of share prices in the recent months can be attributed to emotions – causing undervaluation of Best Buy stock in the financial market. For such a case, mispricing is not likely to sustain for the longer term, and once investors realize their emotional investment making decision, the share prices of Best Buy is likely to correct upwards sharply. As such, purely from such a argument, it is indeed rational and profitable decision to invest in Best Buy due to investors pessimism. In the following paragraphs however, the stock valuation for Best Buy will be performed in greater details.

 

figure4-1

 

4.2 Valuation of Best Buy

In this section, relative valuation methods will be performed, by comparing the financial performance of Best Buy to the peers. The peers of Best Buy selected are as follow: Amazon.com, Wal-Mart and Apple. The various key investment metrics business fundamental, and financial performances of Best Buy is presented in Table 4.2 as follow.

 

table4-2

 

As shown in Table 4.2 above, the market capitalization of Best Buy is lowest among its peers. This could be contributed by the lowest price to earnings ratio assigned to Best Buy. Specifically, the P/E ratio of Best Buy is only 8 times. However, the P/E ratio for Amazon.com, Wal-Mart as well as Apple is relatively high when compared to the P/E ratio of Best Buy. The most surprising findings are that the P/E ratio of Amazon.com is as high as 83 times, a sign of danger, investors’ overreaction, hype and unsustainable share prices. As from the discussion presented above, Best Buy has been working hard to close the competitive gap between its businesses to the business nature of Amazon.com. As such, it is unlikely that Amazon.com will gain its unfair advantages against all of the competitors indefinitely. Indeed, the high P/E ratio suggests that Amazon.com is a good candidate for shorting. For Apple and Wal-Mart however, the P/E ratios are indeed, more easily justified.

From another perspective, it is found that Best Buy again has the lowest PEG ratios among its peers, aside from Apple. Apple has the lowest PEG ratio, primarily contributed by the fast growth rate of the earnings achieved by Apple. Again, the PEG for Amazon.com is the highest, in which, as discussed before, is contributed by investors hype on the new business model or confidence on the so-called high tech companies. It is perceived that such high stock prices in unsustainable. Overall, purely from the PEG ratio, both Apple and Best Buy look like the most attractive investment target.

The price to book ratio for Best Buy of 0.18 is also the lowest among the peers. Again, this is contributed by the depressed stock prices of Best Buy. The price to book ratios for Best Buy and its peers are similar as well. Overall, a review of the entire price multiple suggest that Best Buy stock is sold at a relatively cheap pricing. It is a good candidate for long term investors to buy low and sell high, when the investors pessimism go away and share prices correct to normal.

Then, the profitability ratios of Best Buy as well as its peers are also shown in Table 4.2. It is found that the profit margin and operating margin for Best Buy is comparable to its competitor, namely Amazon.com. Indeed, the net operating margin for Amazon.com is lower than Best Buy. Again, the return on assets as well as return of equity for Best Buy is much better than the performance of Amazon.com, suggesting that Amazon.com may not be the ideal or really profitable companies as most of the market participants perceive. This again strongly suggests that Amazon.com is not as attractive as an investment target for value investors, when compared to Best Buy. The high valuation of Amazon.com, is indeed, hardly sustainable. In contrast, Best Buy is a more stable and profitable companies, and yet, the share prices is selling at an attractive rate. Then, for Companies such as Wal-Mart and Apple, the higher valuation is perhaps justified, as the profit margin, operating margin, return on assets as well as return on equity is outstanding, when compared to the performance of Best Buy.

4.3 Investment Risks

There are however, several investment risks pertaining to the recommendation provided above. There are risks that could affect the returns to be gained from making the investment in Best Buy. Investors should well aware of the possibility and existence of such risks, and then to understand the risks as well as their respective risk appetite before making any investment in accordance to the recommendation provided in this report.

            Highly competitive industry. The industry structure of retailing is a highly competitive. As discussed before, the competitors of Best Buy include the following: discount chains, other retailers operating in consumer electronics segments, home improvement stores, online stores and even traditional hypermarket such as Wal-Marts. The highly competitive industry structure definitely causes the growth path of Best Buy to be more challenging. Indeed, the competitive industry will likely to erode the profit margins of the company. In times of crisis, the fierce competitive between industries players, for shrinking market shares, may further hurt the profitability of Best Buy. Overall, there are much industry risks that may affect Best Buy should the competition intensify within the industry.

High concentration of suppliers. As disclosed by Best Buy’s Form 10K (2010), one of the key risk faced by the company is that it is heavily dependent on few suppliers for the merchandize the company is purchasing. To be exact, it is informed that the company’s 20 biggest suppliers accounted for about 60% of the merchandizes that the company is purchasing. This indicates that the suppliers are probably having higher bargaining power than Best Buy. Besides, in event the relationships with any of these suppliers deteriorated, the profitability of Best Buy will be adversely affected significantly. In event the suppliers face serious issues or operational difficulties, best Buy will likely to be affected negatively as well.

Higher business risks from seasonality impacts. As any observer of the retailing industry, the profitability of the retailers is highly subjected to seasonality effects. From the historical perspective, most of the revenue and earnings of Best Buy is derived from the fourth quarter – which is actually the holiday and shopping season in US, Europe and Canada.

Changes of consumer sentiments and economic climates. In today business environment, the economic outlook in Europe and United States particularly, remain sluggish and fragile. As discussed by Fountas (2010), the economy growth is slow, and yet the world is experiencing an inflationary era. The unemployment rates in the western countries remain high. Economically speaking, this is called stagnation. Under such a situation, the weakening in consumer sentiments will likely put great pressures on the profitability of Best Buy. As such, one of the biggest risks facing Best Buy is due to uncertainty and volatile economic environment. When the economy outlooks turn gloomy, consumers may cut down spending and this will affect the earnings of Best Buy, hence the stock prices of the company negatively.

Changes of consumers preferences. In the consumer electronics industry, consumers’ preferences and tastes have been changing very swiftly. Any discerning observer will likely to aware that consumers have been chasing the trend and changing their preferences over better, newer and innovative designs and equipments in the past. An introduction of cutting-edge design or device is easily taken over by other more innovative and impressive design or device. The product life cycles of the various equipments, devices or software in the consumer electronics industry had shortened significantly in the past few years (Cetron & Davies, 2008). As it is actively acknowledge by the management in Best Buy Form 10K (2010), it is mentioned that the failure to predict the upcoming changes in consumer tastes, demands, preferences, spending pattern and other decisions related to lifestyle will impact the company revenue materially. Not only is that, the wrongly estimation of consumers’ preferences will also likely to affect the company reputation, which will in turn affect the company profitability adversely in the long run. Indeed, the fast changes of consumer trends can be observed from the products contribution to Best Buy revenue in the recent quarter. In Quarter 1 of 2011, the revenue of Best Buy is strongly supported by the sales of Smartphone and iPads. This is not the case in the past, whereby the sales of television are the key contributors of revenue for the company (Phelps, 2011). Obviously, the consumers’ tastes, affected strongly by social trends, such as a sudden fast adoption of apparently cutting edge and cool devices such as iPhones and iPads, will impacts the profitability picture of Best Buy. However, the changes in consumer tastes and preferences can be hardly predictable, and the failure to act accordingly or being responsive to the latest consumers’ demands will definitely affect the firm in the future.

Weakening of US Dollar. Due to quantitative easing as well as the consistently weak consumer confidence in United States, there are real risks whereby USD may depreciate significantly, in relative to the domestic currencies of the international investors. However, as with the prediction on the changes of the economic climates, marketing timing and exchange rates, nobody really able to perform it accurately. As such, it is crucial for foreign investors interested on Best Buy to understand the risks, if they are prepared for taking up such risks before investing in the company.

5.0 Conclusion

Overall, it is reviewed that Best Buy can be considered a traditional business with conservative management. The business nature as the consumer electronic retailers is indeed stable. Best Buy is also enjoying significant economies of scale and thus, less subjected to volatility of economic climates and consumer confidence issues. Not only is that, Best Buy is a multinational corporations with business diversified across nations. Overall, the business derives revenue from a diversified portfolio of product, across geographical regions and hence, is likely to be a relatively stable business to be owned by investors. The drawback of Best Buy is perhaps the little or unexciting growth prospects of the firm. Besides, the macroeconomic and industry forces are also adversely affecting the outlook for Best Buy. As discussed before, the consumer electronic retailing industry is hyper competitive, and has been significantly deteriorating the profit margins of Best Buy and its competitors.

In making investment recommendation regarding Best Buy, the share prices are a crucial element to be considered. The price investors pay will ultimately affect the returns to be gained from the investment. To pay a high price will definitely affect the future stock returns negatively. In this report, a review of the share prices of Best Buy had been performed. It is found that the fears and pessimisms of investors are contributing largely to the sharp drop of Best Buy share prices in the recent months. However, as it is known and understood from the previous analysis that the business of Best Buy is a relatively stable one, the impacts of weak economy may not be as serious as investors thought or perceived. Thus, the sharp drop of share prices in the recent months can be attributed to emotions – causing undervaluation of Best Buy stock in the financial market. However, emotion is not really about the fundamental of the company. Indeed, it is argued that, mispricing is not likely to sustain for the longer term, and once investors realize their emotional investment making decision, the share prices of Best Buy is likely to correct upwards sharply. As such, it is then asserted that it will be rational and profitable decision to invest in Best Buy due to investors pessimism. All of these reasons support Buy Recommendation for Best Buy at its current market prices.

Then, relative valuation had also been performed. The price multiple as well as fundamentals of Best Buy, focusing on the profitability of the business, is compared to its peers. As discussed previously, the P/E ratio of Best Buy is only 8 times. Then, it is also found that Best Buy again has the lowest PEG ratios among its peers, aside from Apple. The price to book ratio for Best Buy of 0.18 is also the lowest among the peers. Next, the price to book ratios for Best Buy and its peers are similar as well. Overall, a review of the entire price multiple suggest that Best Buy stock is sold at a relatively cheap pricing. All of these information draw us to a conclusion that Best Buy is a good candidate for long term investors to buy low and sell high, when the investors pessimism go away and share prices correct to normal. Indeed, the financial performance of Best Buy is satisfactory. It is found that the profit margin and operating margin for Best Buy is comparable to its competitor, namely Amazon.com. Then, the return on assets as well as return of equity for Best Buy is much better than the performance of Amazon.com. In a nutshell, all of these findings support the notion that Best Buy is a good investment target. Last but not least, other positive sign pointing to Best Buy as attractive investment target include the following: (a) exposure of Best Buy in China, (b) share repurchase, (c) availability of insider buying, as well as (d) adoption of business ethics by the company.

Then, the investment risks associated with the Buy Recommendation presented in this report is also outlined. Among the possible risks associated with the recommendation, that demand investors attentions include the following: (a) highly competitive industry, (b) high concentration of suppliers, (c) higher business risks from seasonality impacts, (d) changes of consumer sentiments and economic climates, (e) fast changes of consumers’ preferences, and (f) weakening of US Dollar. Most importantly, investors should well aware of the possibility and existence of such risks, and then to understand the risks as well as their respective risk appetite before making any investment in accordance to the recommendation provided in this report.

6.0 References & Bibliography

 

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Buchta, J., & Phelps, D. (2011, 14 June). Best Buy’s 1st quarter net income falls, but beats forecasts. McClatchy – Tribune Business News, 19.

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Bustillo, M. (2011, June 17). Best Buy Settles Discrimination Case. Wall Street Journal (Online), 7.

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Latchem, J. (2011, July). The Upside-Down ‘Hobo’. Home Media Magazine, 33(28), 17.

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Phelps, D. (2011, 14 April). Best Buy’s plans include shrinking U.S. stores, more online sales. McClatchy – Tribune Business News, 14.

Phelps, D. (2011, 15 June). Hand-helds come to Best Buy’s rescue. McClatchy – Tribune Business News, 21.

Phelps, D. (2011, 22  June). Best Buy to repurchase $5 billion of shares. McClatchy – Tribune Business News, 3.

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Rowley, A.  (2011, August 11). Deep recession may be the only epilogue :Hyper inflation will set in once US and Europe central banks bail out troubled govts. The Business Times, 2.

Royal, J. (2011, 28  July). Wilmington Best Buy goes against tide of shrinking retail stores. McClatchy – Tribune Business News, 5.

Salisbury, S. (2011, 9 July). ‘Service’often missing in ‘customer service,’ survey finds. McClatchy – Tribune Business News, 12.

Schmidt-Hebbel, K. (2010). A gloomy outlook. Organisation for Economic Cooperation and Development. The OECD Observer,(270/271), 56-57.

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