Click image to enlarge
demise of a major competitor isn’t the only positive development for
Best Buy. The company is expected to derive long-term benefits from its
aggressive overseas expansion, noted members of BetterInvesting’s
Editorial Advisory and Securities Review Committee. And the recent
introduction of a high-definition 3-D television could lead to
increased store traffic as consumers satisfy their curiosity about the
new technology, members suggested.
The company continues to
innovate, experimenting with new merchandise lines and retailing
concepts. That adaptability is a major part of management’s strategy as
competition in consumer electronics continues to heat up at both ends
of the spectrum.
Small regional chains moving to fill the
Circuit City vacuum could represent long-term challenges, for example.
Big-box discounters such as Wal-Mart, Sears, Target and Costco are
expanding their consumer electronics offerings. Amazon.com caters to
the growing number of consumers who prefer to purchase electronics
sells consumer electronics and related products through its Best Buy
stores and other retail outlets in the United States, Canada, China,
Europe and Mexico. In the domestic market, the heaviest store
concentrations are in California, Texas, Florida, Illinois and New
The consolidated sales breakdown for fiscal 2008 was as follows:
• Consumer electronics — 36 percent
• Home office — 34 percent
• Entertainment software — 17 percent
• Appliance — 6 percent
• Services— 7 percent
the past year the company has expanded significantly, tripling its
worldwide store count. Much of the growth in the number of outlets
resulted from its Best Buy Europe joint venture.
2008 (ended Feb. 28, 2009), the company was operating 3,953 stores of
all types worldwide. Of these, 1,023 — 25.9 percent — were outlets
located throughout the United States, except for Wyoming.
Line labels the year ended Feb. 28, 2009, as fiscal year 2008. Best Buy
opts to call the period fiscal 2009. Value Line’s definition is used
throughout this article.)
Although domestic Best Buy stores
and the company’s other U.S. outlets now represent only a quarter of
the individual locations worldwide, they still generate most of the
company’s results. Domestic outlets represented 75.4 percent of the
company’s 54.3 million square feet of selling space in fiscal 2008.
U.S. sales were 78 percent of the 2008 total.
Over the past
nine years Best Buy has acquired or launched several chains
complementing its core business. In 2007, for example, Best Buy
acquired Pacific Sales, which specializes in high-end kitchen
appliances, plumbing fixtures, home entertainment products and home
furnishings. The chain comprised 34 West Coast stores in fiscal 2008.
unit is Magnolia Audio Video, acquired in 2001. The chain retails
high-end entertainment merchandise in its six West Coast stores.
2003 Best Buy acquired the Geek Squad, a Minneapolis-based service
business. Its employees provide residential and commercial customers
with on-site electronics repair, support and installation. The service
is available in Best Buy stores, as well as in six stand-alone
In 2002 Best Buy acquired Future Shop. It’s the
leading consumer electronics retailer in Canada, with 139 stores at the
end of fiscal 2008. The company also had 58 Best Buy outlets in Canada
One of Best Buy’s innovations is its
store-within-a-store concept for marketing distinct product categories.
Best Buy Mobile, for example, sells mobile phones, accessories and
related merchandise inside Best Buy stores. In fiscal 2008 there also
were 38 stand-alone Best Buy Mobile outlets, more than quadruple the
number open in mid-Atlantic locations the year before.
Buy launched the unit in 2006 when it began working with The Carphone
Warehouse, a British company that has become Europe’s leading retailer
of mobile devices. The next year the two companies formed Best Buy
Europe. The joint venture had 2,465 overseas locations at the end of
Near the end of 2008 the company completed its
acquisition of Jiangsu Five Star Appliance, a major Chinese retailer
with 164 stores. The company is also operating five Best Buy stores in
In fiscal 2007 Best Buy acquired Napster, a
well-known music downloading service. Similarly, the company recently
acquired a stake in CinemaNow, a movie downloading service. The deals
provided Best Buy with a way to maintain a position in entertainment
media despite declining sales of CDs, DVDs and entertainment software.
Finance reports that Best Buy’s chief direct competitors are publicly
traded Apple Inc. (AAPL), Amazon.com (AMZN) and Wal-Mart Stores (WMT).
Other challengers are hhgregg and P.C. Richard, two rapidly expanding
regional chains that in some cases are moving into territories formerly
served by Circuit City. Additional competition comes from wholesale
clubs, office supply chains and mail-order and Internet retailers.
& Poor’s classifies Best Buy as a computer and electronics
retailer. Publicly traded companies in that category include GameStop
(GME), Glentel (GLN), RadioShack (RSH) and Rex Stores (RSC).
Buy’s roots go back to 1966, when Richard M. Schulze launched Sound of
Music, an audio components retailer. As the chain expanded beyond the
Minneapolis area, it added categories of consumer electronics
merchandise. The company adopted its current name in 1983 and went
public in 1985.
Schulze, 70, remains chairman. Brian J.
Dunn, 49, is CEO, president and chief operating officer. Dunn, who
joined the company in 1985, became its leader in June 2009. He took
over from Bradbury Anderson, who retired.
17.1 percent of 418 million common shares outstanding, the company
reported in its May 2009 proxy statement. He and other officers and
directors combined owned 19 percent. Institutions recently held 73.5
percent, according to Value Line.Retailing Innovations
March Best Buy began carrying Panasonic’s new 50-inch 3-D television
system. The technology, which has gained popularity in theaters, is
just now becoming available to consumers. Major television
manufacturers Sony, Samsung Electronics and LG Electronics reportedly
plan to launch their own versions.
discounted, the Panasonic systems remain costly at about $2,500.
Analysts therefore predict 3-D television may be slow to add much to
Best Buy sales. But with no other revolutionary, “must have” consumer
electronics arriving soon, 3-D may at least get curious but wary
customers into the stores.
In its efforts to adapt
continually to industry changes, Best Buy tests how well consumers
accept new merchandise offerings. For example, the company has begun
selling patio furniture, grills and related outdoor merchandise through
its website. In a test, a few California outlets are stocking the
Another new category is electronics related to
exercise and health care. Forty stores recently began stocking portable
heart rate monitors, pedometers, headphones and conditioning
accessories. Some of the outlets are also selling exercise machines.
year the retailer began selling used video games out of kiosks set up
in several Texas and Canadian stores. And Best Buy is continuing its
market test of musical instruments and related electronics. Some stores
are carrying items such as guitars, keyboards, software and accessories.
another recent departure from consumer electronics, Best Buy has begun
selling Enertia battery-powered motorcycles. About two dozen West Coast
stores participated in the initial test, and Best Buy reportedly plans
to market the vehicles in more states this year.Final Notes
Line, the source for the financial results in this article, reports
adjusted quarterly earnings per share but not quarterly net income. For
diluted EPS, the Value Line and company-reported figures match for
third-quarter 2009 and the year to date. The company-reported figures
for 2008 were considerably lower, however. Valid year-over-year
comparisons of net income therefore can’t be made.
the partially completed Stock Selection Guide shows the range of
calendar-year market prices, which are taken from the Value Line
report. In contrast, BetterInvesting’s S&P Stock Data Service
provides fiscal-year pricing data. Here are the rounded fiscal-year
price ranges for the past five years:
• $29.20 to $41.50 (fiscal 2004)
• $31.90 to $56.00 (fiscal 2005)
• $43.50 to $59.50 (fiscal 2006)
• $41.90 to $53.90 (fiscal 2007)
• $16.40 to $49.00 (fiscal 2008)
goal for a Stock to Study is a 100 percent return (market price
appreciation plus dividends) within five years. BetterInvesting is
profiling Best Buy for educational purposes only. No investment
recommendation is intended.
BetterInvesting featured Best
Buy as the Undervalued Stock for January 2009. The company ranked No.
74 in the Top 200 survey of investment club holdings for 2009 (see the
April 2010 issue). An estimated 307 clubs owned its shares.
company instituted 3-for-2 stock splits in 1987, 1993, 2002 and 2005.
Shares underwent 2-for-1 splits in 1986, 1994, 1998 and 1999. Best Buy
has instituted a direct stock purchase as well as a dividend
Internet links to background on Best
Buy and its industry can be found in the online version of this article
at the BetterInvesting website. To request more information, contact
Investor Relations, Best Buy Co., Inc., 7601 Penn Ave. S., Richfield,
MN 55423-3645.SSG Notes
During your analysis of Best Buy, you might consider the following comments and questions for further study:
Capitalization section: About 19 percent of Best Buy’s stock is owned
by insiders. That’s a high percentage, indicating that management’s
interests are aligned with those of other shareholders. Note, however,
that one person — company chairman Richard Schulze — accounts for the
vast majority of those insider holdings. Best Buy’s percentage of debt
to total capital stands at almost 29 percent. Value Line projects that
the company’s long-term debt will drop to $600 million in 2012-2014
from about $1.1 billion currently; it has assigned a Financial Strength
rating of A to Best Buy. Value Line also estimates that current common
shares outstanding will continue falling from historical levels over
the next several years. If you use the Preferred Procedure to estimate
future earnings per share, how will this history affect your forecast?
Section 1 (Visual Analysis of Sales, Earnings and Price): Best Buy’s
historical sales growth looks quite steady, as does earnings growth
except for last year. The stock price, however, has experienced
significant fluctuation in several years — 2000 to 2003, for example,
along with 2008.
• Section 2 (Evaluating Management): The
pre-tax profit margins appear low compared with companies in other
industries, but how does Best Buy stack up with other retailers? The
margins themselves were steady in 2003-2007 before falling in 2008.
Return on equity has grown over the past five years. Note, however,
that Best Buy added debt in 2008. This can inflate ROE.
Section 3 (Price-Earnings History): The high P/E was above 20 in 2004,
2005 and 2006 before dropping to 17-18 in 2007 and 2008. How will this
affect your expectations of the high P/E in future years? Websites of Interest
Best Buy Co., Inc.Consumer Electronics Association
Editorial Advisory and Securities Review Committee met March 26. The
Stock to Study and Undervalued Company that its members selected were
announced shortly afterward. Look for the Stocks to Study box on the
right-hand side of the homepage. The link takes you to the announcement
at the BetterInvesting Newsroom (www.betterinvesting.org/
— Reporting by contributor Kevin Lamiman