Financial Analysis: Best Buy 1

Financial Analysis: Best Buy

Students Name
 Financial Analysis: Best Buy 2

Company Overview:

Best Buy is one of the largest retailers of the world in the field of consumer electronics

having more than 1099 stores across the world with more than 180000 employees. Best Buy,

North America's number one specialty retailer of consumer electronics, personal computers,

entertainment software, and appliances, has annual revenues of over $1 billion and employs over

10,000 people. The retailer offers customers an extensive selection of affordable, easy-to-use

products in a fun, informative, and no-pressure shopping environment. Best Buy customers can

purchase products whichever way is more convenient, at the brick-and-mortar retail stores or

online.

The store operates under two major segments i.e. Domestic and International. The

domestic existence of Best buy is in United States whereas the international operations

comprises of Canada, Europe, China, Mexico and Turkey. The company started its international

operations in 2002.

The company operates under different brands internationally like Best Buy, Best Buy

Mobile, Geek Squad, Magnolia Audio Video, Napster and Pacific Sales in United States, Best

Buy, Best Buy Mobile, Cell Shop, Connect Pro, Future Shop and Geek Squad in Canada, Best

Buy, The Carphone Warehouse, The Phone House and Geek Squad in Europe, Best Buy, Geek

Squad and Five Star in China, Best Buy and Geek Squad in Mexico and Turkey. (10-K annual

fillings 2011)

Operations and Supply Chain:

In 1996, Best Buy decided to implement a data warehouse to enhance merchandising and

supply chain management. The primary goal of Best Buy's data warehouse is to monitor margin

analysis by product, product group, and region to determine what is moving and what factors
 Financial Analysis: Best Buy 3

contribute to sales. The information technology personnel explicitly sought a flexible IT

infrastructure, anticipating that this would provide lots of long-term advantages. The key benefits

the company has received from its data warehouse include:

Simplified information

Consolidated information

Enhanced infrastructure for data warehousing operations

Reduced complexity and administration costs

Increased performance and scalability

Streamlined business processes

Today, the data warehouse provides full details of every point-of-sale transaction from

every Best Buy retail store over the last two years, as well as extensive detail on suppliers and

products. Best Buy's employees have numerous tools that help them analyze the information in

the data warehousedecision support systems, executive information systems, digital

dashboards, and data marts. Detailed information on every transaction in every store is loaded

nightly into the data warehouse. As a result, retail managers are able to respond immediately to

changes in customer behavior with respect to product purchase patterns, model preferences,

returns, requests for service, and warranty claims. The implementation of the data warehouse has

greatly improved Best Buy employees' ability to make decisions and solve problems.

Strategy:

The company strongly focuses on acquisition strategy so as to expand its market base in

the international market and cater to the needs of the consumer across the market. The company

has also focused on catering to the mass market by entering as an online retailer. Through this

the company was able to attract the mass market and cater to the market across the globe. The
 Financial Analysis: Best Buy 4

company gives strong focus to the needs and demand of the consumers with a strong emphasis

on supply chain management.

Ratio Analysis:

Ratio analysis is one of the most widely used tools of financial analysis. It is essentially

an attempt to develop meaningful relationship between individual items or group of items in the

balance sheet or profit and loss account. The objects and utility of ratio analysis is confined not

only to the internal parties but to the credit suppliers, bans and lending institutions also. Ratio

analysis tells about the financial position of the enterprise as to whether the capital structure of

the business is in proper order, whether the capital structure of the enterprise is satisfactory,

whether the credit policy in relation to sales and purchases is sound and whether the company is

creditworthy. Thus, ratio analysis highlights the liquidity, solvency, profitability and capital

gearing position.

Ratio Analysis of Best Buy

Fiscal year 2010 2009 2008

Liquidity Ratio

Current Assets / Current

Current ratio Liabilities 1.21 1.18 0.97

(Current Assets - Inventory) /

Quick ratio Current Liability 0.53 0.57 0.41

Average Accounts Receivable /

Collection Period Sales/360 15.86 14.28 15.15

Average Inventory / Cost of sales

Days to sell inventory / 360 55.23 49.78 51.00

Cash ratio Cash + cash equivalent + 0.13 0.21 0.06

 Financial Analysis: Best Buy 5

Invested funds / Current

Liabilities

Capital Structure and Solvency

Total Liabilities / Shareholders

Total debt to equity equity 1.45 1.63 2.07

Long term debt to Long term liabilities /

equity shareholders equity 0.26 0.34 0.43

Times Interest earned EBIT / Interest expenses 24.30 23.78 19.89

Return on Investment

Return on Assets Net Income / Avg. Total Assets 7.06% 7.72% 6.34%

Return on Common Net Income / Average

equity shareholder's equity 17.92% 21.73% 19.45%

Operating Performance

Gross profit margin Sales - COGS / Sales 25.14% 24.47% 24.43%

Operating profit

margin Income from operations / Sales 4.21% 4.50% 4.15%

Net profit margin Net Income / Sales 2.54% 2.65% 2.23%

Asset utilization

Sales / Average cash and cash

Cash turnover equivalent 34.33 42.77 90.39

Accounts receivable Sales / Average accounts

turnover receivable 23.02 25.56 24.10

Inventory turnover COGS / Average inventory 6.61 7.33 7.16

Total assets turnover Sales / Avg. total assets 2.78 2.91 2.84
 Financial Analysis: Best Buy 6

Considering the ratios of the company we can analyze that the company has focused on

improving its performance from last three years.

Liquidity Ratios: Liquidity ratios are used to measure firms short term obligations. It

helps in comparing short term obligations with short term resources available to meet these

obligations. Liquidity ratios show the relationship of a firms cash and other current assets to its

current liabilities. The current ratio of the company has improved from last three years, in 2011

the current ratio of the company has improved to 1.20 from 1.17 in 2010 i.e. the companys

ability to meet short term obligations has improved in past three years.

Comparing the quick ratio to the current ratio we can see that the quick ratio has

decreased in 2011 as compared to 2010 which means that the company hold large inventory as

compared to 2010. The collection period and days to sell inventory of the company has also

increased as compared to 2010.

Overall the liquidity of the company has improved only in terms of current ratio.

Capital Structure and Solvency: These ratios help in analyzing the long term solvency of

the firm. These ratios are based on the proportions of debt and equity in capital structure of the

firm. The debt contributed by the creditors to the firm requires fixed interest payments and

repayment of the loan. If there are a high proportion of funds that are contributed by the owners,

then it indicates that there is a surplus of finance which shields the firms leverage.

Overall the capital structure or solvency ratio of the company has improved as compared

to previous years; the company has been able to decrease on its liabilities and debts as compared

to the previous year which depicts the financial strength of the company.
 Financial Analysis: Best Buy 7

Return on Investment: These ratios help in evaluating the efficiency of the assets utilized

by the firm. The company has focused on improving its sales thus improving its efficiency and

returns on investment.

Operating Performance Ratios: These ratios are also known as Profitability ratio.

Profitability ratios show the combined effects of liquidity, asset management and debt on

operating results of the firm. The company has focused on decreasing its cost of goods sold so as

to increase its gross profit, but the company has not been able to focus on reducing its operating

expenses.

Overall, the company has decreased on its financial health with the increasing

competitive environment.

Trend Analysis (Exhibit in the attached excel sheet)

Considering the trend of the company we can see that the company has shown an

improvement in the sales and earnings as compared to its base year. The company had higher

profits in the year 2010, as compared to 2011. The company was able to improve on its assets

and decrease its long term liabilities as compared to its base year.

Forecasting: (Exhibit in the excel sheet)

The company needs to focus on improving its performance, it is predicted that the

company will have the growth the prospective years on this basis. The company is expected to

grow by about 2% in this competitive market. The company will be able to improve on its

returns and ability to decrease its liabilities and debts.

Stock Analysis:

The company is being traded at $30.69 as on 3rd June 2011, with a 30 day average

volume of 5.58 million. The company has the market capital of 11.9 billion. The dividend yield
 Financial Analysis: Best Buy 8

of the company is 1.93%. The revenue of the company is 50.27 billion as on 3rd June with the

earnings of about $1.28 billion.

Considering the stock performance of the company we can see that the companys stock

witnessed a lowest share prices in the year 2009 due to economic crisis in the market. The share

prices of the company started to fall from year 2007 with a dramatic fall in 2009. The company

started improving its performance since 2009. The companys performance again declined from

2010.

Comparative Analysis:

Comparing to the S&P of the retail sector, the company has not been able to cope up with

the competition and has been a laggard comparing to Wal-Mart and Amazon.com who are one of

the biggest competitors of the company.

 Financial Analysis: Best Buy 9

Conclusion:

Best buy is one of the largest consumer electronics company with a strong focus on

catering to the needs of the consumers. The company has witnessed financial downfall with the

increasing competition. The company is focusing on improving on its performance and cutting

down its costs so as to compete in the market.

Considering the current situation of the company, I would suggest to invest in the

company as the shares of the company is improving with the improvement in the sales and

income of the company.

Financial Analysis: Best Buy 10

References:

Annual Report of the company, available at: http://phx.corporate-

ir.net/phoenix.zhtml?c=83192&p=irol-sec [Accessed on 5th June 2011]

Block Stanley B., Hirt Geoffrey A., Danielsen Bartley R. (2009), Foundations of

Financial Management, Thirteenth Edition, McGraw-Hill, a business unit of the

McGraw-Hill Companies, Inc.

Brealey Richard A., Stewart C. Myers, Alan J. Marcus, (2007), Fundamentals of

Corporate Finance, 5e, The McGraw-Hill Companies

Ross Stephen A., Randolph W. Westerfield, Bradford D. Jordan, (2010),

Fundamentals of Corporate Finance, Ninth Edition, McGraw-Hill Company

Stock Information, available at: http://www.dailyfinance.com/quotes/best-buy-

incorporated/bby/nys [Accessed on 5th June 2011]