Financial Analysis ProjectNora BaertschiNicolas Bigler

Brian DeMontfort

• Began in 1966 as Sound of Music• Changed name to Best Buy 1983• Incorporated in 1985 in Minnesota

Historical Growth• Total Revenues increased 28 million in 8 years• Estimated 1000 U.S. stores• International Expansion

Brian Dunn CEO

• CEO of Best Buy Inc. since June 24, 2009• 23 years experience with Best Buy

Recent Events

• Partnerships • Best Buy is going green• Breaking into the U.K. market

Industry Overview

• Retail- Computer and Electronics Industry• Industry Growth

• Revenues: Industry leader• Revenue growth: Rank 5• Return on investments: Rank 4

Retail-Computer and Electronics S&P 500

0.23% -5.20%

Financial Health

• Activity ratios

– Strong sales– Effective use of fixed assets– Efficient in collecting money from customers

Best Buy Industry

Inventory Turnover 7.16 0.20

Fixed Asset Turnover 5.9 0.08

Accounts Receivable Turnover

24.1 1.32

Financial Health

• Liquidity Ratios

– Ratio decreasing over past years– Due to increase in liabilities– Low liquidity -> risky

Best Buy 2009 Buy 2007 Industry 2008

Current Ratio 0.97 1.44 1.25

Financial Health

• Profitability Ratios

– Higher margins than industry average– Constantly falling -> price pressure from

competitors

Best Buy Industry

Operating Margin 3.91 0.13

Net Profit Margin 2.23 0.07

Financial Health

• Common Stock Ratios

– People are willing to invest in Best Buy– Dividend Yield is increasing

Best Buy Industry

P/E Ratio 14.59 0.47

Dividend Yield 1.96 0.02

Best Buy’s Stock (NYSE: BBY)

• 416,539,000 shares of common stock

• Market capitalization of $18.3 billion

• Share last Traded at $43.54 (12/08/2009)

Price Evolution 2002-2009

Comparison Stock Return/Market Return

Evolution of the Best Buy Stock and the S&P 500 over the last 5 years:

-Best Buy’s stock return more volatile than S&P 500’s return(higher highs and lower lows)

-During years 2005-2007, Best Buy’s stockgained 38%, S&P 500 only 21%

-During the terrible 2008 crisis, Best Buy’s share lost 60%, S&P 500 “only”dropped by 38%

Comparison Stock Return/Market Return

Evolution of the Best Buy Stock and the S&P 500 over the last 12 months:

-Again, much higher volatility for BBYBest Buy = lot of waves, high volatilityS&P 500 = steadier movement

-Rate of return over the last 12 months:Best Buy: +84%S&P 500: +23%

-Monthly average rate of returnDec 08 – Nov 09:Best Buy: 7.3% (with 2 months of morethan 30% rate of return)S&P 500: 1.9% (no month with morethan 10% rate of return)

Beta / Risk of Best Buy

• Beta (Reuters Finance): 1.36

• Investors should be aware that investing in Best Buy’s stock comes with a fairly high degree of risk

• In times of recession or crisis, the stock might drop severely

• However, when the economy recovers or is doing well, the expected returns can be pretty high compared to the market return (as we saw in 2009)

• Because of that, a good investor would diversify its portfolio with Best Buy shares along with lower-risk equities

Debt Policy- Best Buy has been increasingly relying on debt over the past years:

Debt ratio: Debt-Equity ratio:2007: 54.30% 2007: 1.192008: 64.85% 2008: 1.852009: 70.66% 2009: 2.41

- High Leverage, but because Best Buy is a well established company, they can get away with it.

- Trend might be explained by the fact interest rates are decreasing and therefore it becomes cheaper for the company to borrow money.

Debt Policy

• $2,247 million in total debt

• $1,111 million are long-term debt

• More than 80% of the long-term debt is composed of 2 bonds

Debt Policy

• U.S. Corporate Debentures

• Maturity date 07/15/20013• Coupon rate 6.75%• Amount: $500 million.• Last Price: 110.074• Fitch Rating: BBB+

• Yield: 3.73%• U.S. Treasury bond yield for similar maturity: 1.22%

Debt Policy• U.S. Corporate Convertible• Maturity date 01/15/2022• Coupon rate: 2.25%• Amount: $402.5 million• Last Price: 110.00• Fitch Rating: BBB

• Yield: 1.3%• U.S. Treasury bond yield for similar maturity: 3.43%

• Low coupon rate because the bond holder can convert the bond into common stock.

• For the company, benefit is a reduced cash interest payment.• The disadvantage is that the value of shareholder's equity is reduced due to the

stock dilution expected when bondholders convert their bonds into new shares.

Summary

• SWOT ANALYSISStrengths:-Industry leader-Brand recognition-Low priced products-Strong online presence

Weaknesses:-Impersonal customer service-High costs of large warehouses-High debt to equity ratio

Opportunities:-Increasing demand for consume electronics-Opportunity to expand globally

Threats:-Strong competitors-Economic downturn and decreasing consumer spending

SummaryRecommendation for Best Buy’s stock: BUY

- The economic outlook is getting better.- The company is well managed, has solid ratios (except liquidity and leverage ratios).- Bullish trend should continue, but with lower returns than in 2009.- Target of 10-15% annual rate of return over the next 2-4 years.

Analyst recommendations:Buy: 7Outperform: 6Hold: 14Underperform: 0Sell: 0