I. Overview of the Company

Best Buy, Inc is the leading provider of consumer electronics in the United States,with more

than 1,400 stores throughout the US and Canada, and another 2,600 stores in Europe and

China, mostly under the Best Buy, Best Buy Mobile, and The Car Phone Warehouse banners.. In

addition to personal computers and consumer video and audio products, Best Buy outlets,

which are on average about 44,000 square feet in size, offer large and small appliances, ranging

from washer and dryers to coffeemakers, and entertainment software, including video games,

DVD’s , and computer software. In addition, Best Buy offers installation and maintenance

services, technical support, and subscriptions for cell phone and Internet services.

Best Buy, first known as Sound of music, was an audio specialty store opened up in Saint

Paul, Minnesota in 1966. An unfortunate event in 1981 would occur that would change the

history of the company and create the name that the company goes by today. On June 14,1981

a tornado hit one of the Sound of Music stores, which prompted them to have a “Tornado

sale,” with the sale promoted as a “Best Buy.” They began to do this sale annually and in 1983

the board of directors agreed to change the name to Best Buy Co, Inc..

The company then grew to a greater variety of products and it is now a specialty retailer of

consumer electronics, home office products, entertainment software, as well as appliances and

related services. Since its opening Best Buy has grown in size, over 1,00, with locations around

the world.

Starting in the year 2000 Best Buy opened up its first web site for online retailing. In 2004

Forbes magazine named them company of the year. In the year 2005 they were the first major

retailer to announce the removal of all mail-in rebates. In 2006 it made Fortune magazine’s list

of most admired companies. Since March 9, 2009 Best Buy has been the lead electronics store

after is competitor Circuit City went out of business.

Best Buy stores are company owned therefore they cannot be franchised. Best Buy is run by

the following people; The Chairman of the Board is Richard M. Schulze. The Chief Executive

Officer and Director is Brian J. Dunn. The Vice Chairman of the Board is Bradbury H. Anderson.

II. Past Performance

In its first year the company generated $173,000, which prompted Schulze to buy out his

partner 4 years after the opening and expand the chain. At this time Sound of Music mainly

focused on selling audio for car and stereo but Schulze felt they were too limited and in 1979

they became the first suppliers of vcr’s, video and laserdisc equipment.

Best Buy continued to do well in sales, but they were struggling with making a profit.

Sales had practically doubled to $439 million in 1988, but net earnings had declined by 64

percent, mainly because of competition and price wars with Highland Superstores. Best Buy’s

answer for this was to totally change their format and go to what they called Concept II stores.

The idea behind Concept II was that the superstore format was not in line with the needs of

most shoppers. Thus the revamped Best Buy stores would feature well-stocked showrooms

averaging around 36,000 square feet, fewer salespeople, more self-help product information,

Answer Centers for those requiring personal assistance, and one-stop purchasing.

From 1989 to 1992 corporate sales rose annually by 23 percent, while the industry as a

whole expanded by a yearly average of just 3 percent. From 1992 to 1993 revenues catapulted

for the first time beyond the $1 billion mark, from $929 million to $1.6 billion, for an increase of

74 percent. During this same period net earnings soared 107 percent to just less than $20

million. In 1995 the company added 47 new stores and moved into new areas, including Miami

and Cincinnati. By late 1995 Best Buy was close to taking of the market share lead of Circuit

City. With 8.7 percent of the consumer electronics market, Best Buy stood only a tenth of a

percent behind Circuit City. By 1997 Best Buy had achieved its goal of becoming the industry

leader, but it’s profits dropped considerably to a dismal $1.7 million on revenues of $7.77

billion, translating into a minuscule profit margin of 0.02 percent. In early 1997,Best Buy had to

ask its creditors and vendors for an extra 60 days to pay its bills. Its stock tanked, dropping as

low as $1.31 per share during the year, and finishing at $1.54, and it appeared that Best Buy

might be destined for bankruptcy.

However, significant changes were made to the product mix, particularly by eliminating

slower selling product lines and models and management was drastically changed. This led to

inventory turning over at a quicker pace and net profits for 1998 jumped to a record $94.5

million on record revenues of $8.36 billion. By June 1998, following a two-for-one stock split,

Best Buy's stock had soared 900 percent since February 1997, to a split-adjusted $36 per share.

One of Best Buys greatest moves to separate themselves from the competition was the

acquisition of the Geek Squad. The Geek Squad was bought in October 2002 for a mere $3

million and has way out produced what was paid for it. Best Buy’s best year was 2004, overall

revenues rose 17 percent, reaching nearly $25 billion, while net income totaled $705 million.

Times have definitely changed for Best Buy in 2011 Best Buy, which has about 1,400

stores nationwide, launched plans to wall off parts of its enormous stores and sublet space to

smaller retailers such as beauty salons and grocery stores. They plan to trim $800 million off its

costs by 2015, starting by slashing $250 million in the current fiscal year. The company's plans

include cutting 400 jobs .In a new plan of action the company said it will open 100 small-scale

Best Buy Mobile stores, which are devoted to selling smart phones and tablets and located in

many mall.

III. Ratio Analysis

Ratio analysis is used to evaluate relationships among financial statement items. The

ratios are used to identify trends over time for one company or to compare two or

more companies at one point in time.

A. Liquidity

Liquidity ratios provide information about a firm’s ability to meet its short-term

financial obligations. They are of interest to those extending short-term credit to the

firm because of they obvious reason of when they can get their money back.

Ratio 2009 2010 2011 RadioShackCurrent Ratio .971 1.18 1.21 2.73Quick Ratio .408 .567 .528 1.61

I decided to use both Current Ratio and Quick Ratio to analyze Best Buy’s liquidity.

Current Ratio is a good ratio to use but in the business of retail electronics, I felt I

would get a better picture by using the Quick ratio. Quick ratio does not include

inventory, which in Best Buy’s case having a high inventory in not necessarily a good

thing because they may be difficult to liquidate.

First, looking at the year 2009, Best Buy had a CR of .971 and a QR or .408. I

could not find an Industry Average for these two ratios so I instead compared Best

Buy to its competitor Radio Shack. Compared to Radio Shack, Best buy had an

extremely bad CR and QR, meaning creditors would have more trust in lending more

to Radio Shack then Best Buy.

In 2010, Best Buy’s Current Ratio and Quick ratio increased quite a bit. Looking at

the Balance sheet, I think one of the main reasoning behind this was that their Cash

went up by over a million, increasing their current assets while their current

liabilities stayed the same. I was curious to see if their increase to current assets was

due to inventory, which would not be that good of a sign, but it was not, and cash is

the best asset to increase. Still though, Best Buy’s CR and QR is far below that of

competitor Radio Shack.

In 2011, Best Buy, if you just look at their current ratio, has an increase from

2010. However, if you look at their quick ratio, which I think is a better indicator,

their ratio actually decreased from the prior year. In 2011, Best Buy’s Inventory and

Net receivables was the only asset to increase. That added to the decrease in

liabilities make it seem like they had a positive year and their CR reflects that. Using

the Quick Ratio shows that Best Buy really had a down year, because of not including

Inventory, it reflects the fact that their most import asset, cash, decreased from the

following year, and their least important asset, Inventory, increased quite a bit.

Looking at all three years compared to competitor Radio Shack, it is pretty

obvious that creditors felt it was risky to lend Best Buy money, even though they are

a much bigger company than Radio Shack

B. Asset Management

Asset Management ratios compare the assets of a company to its sales revenue.

Asset management ratios indicate how successfully a company is utilizing its assets

to generate revenues. Analysis of asset management ratios tells how efficiently and

effectively a company is using its assets in the generation of revenues. They indicate

the ability of a company to translate its assets into the sales. I decided to use the

Inventory Turnover ratio to compare the years of 2009-2011 of Best Buy.

Ratio 2009 2010 2011 RadioShackTurnover Ratio

9.47 9.05 8.53 5.88

In 2009, Best Buy’s turnover ratio was a staggering 9.47, meaning it would only

take them 1.3 months to sell through their inventory or they turnover their

inventory 9.47 times per year. As compared to their competitor, RadioShack, Best

Buy outperformed them by close to 4 turnovers per year. Unfortunately the

following year, in 2010, the TA decreased to 9.05. Looking at the Balance Sheet and

Income statement, this decrease was due in large part to inventories increasing by

close to 1 million. Once again, In 2011, another decrease occurred to Best Buy’s

turnover ratio, dropping it to 8.53.

Although Best Buy’s TA was on a constant down slope from 2009-2011, they still

were much better at getting their inventory sold then Radio Shack. This can explain,

slightly, how Best Buy’s revenue is much higher than RadioShack.

C. Debt Management

Debt Management Ratios attempt to measure the firm's use of Financial Leverage

and ability to avoid financial distress in the long run. Lower value of debt ratio is

favorable and a higher value indicates that higher portion of company's assets are

claimed by it creditors which means higher risk in operation since the business

would find it difficult to obtain loans for new projects.

Ratio 2009 2010 2011 Industry Avg.Debt Ratio 70.7% 65.5% 63% 53.44%

First, looking at Best Buy’s ratio is 2009 you can see that it is almost over 20% higher

than the industry average. This means that 70.7% of Best Buy’s assets are financed

through debt. This is dangerous for a company because they can become insolvent.

If they run into a major dilemma where they need to borrow money, creditors would

be hard willing to lend it to them.

In 2010, as you can see on the chart above, Best Buy’s Debt Ratio decreases,

which is a positive direction. By looking at their balance sheet, it seems the reason

for this decrease was because of a $2.5 million increase in asset, with Liabilities

staying mainly the same. An increase in assets is mostly a positive occurrence, but if

it is all due because an increase in inventory that may be a bad sign. For Best Buy, it

is kind of a mixed bag. The bad thing is that they had almost over a million increase

in inventory, which may be due to outdate electronics that didn’t sell. However, the

good thing is that their cash, accounts receivable, and short-term investments were

the major reason for an asset increase.

In 2011, Best Buy had another decrease in their Debt Ratio, but it was still much

higher than the Industry average. In this year it looks like Best Buy made it a point to

try and get rid of some of its debt. They lowered their Long-term debt, and may have

bought more inventories from cash then on account. I believe this to be the case

because, in 2011, Best Buy’s inventory went up but their account payable went

down, along with cash.

D. Profitability Ratio

Profitability ratios offer several different measures of success of a company at generating a

profit. Profit margin is very useful when comparing companies in similar industries. A higher

profit margin indicates a more profitable company that has better control over its costs

compared to its competitors.

In 2009, even though Best Buy had the largest revenue in the industry, they were slightly below

the Industry average in profit margin. This is due to their high cost of revenue and all the

employees that are needed to be paid. In 2010, Best Buy exceeded the industry average by .3%.

A good sign, but I think that a company as big as Best Buy, with one of its competitors recently

going bankrupt to have a much higher profit margin. This is a big reason why you see Best Buy

trying to go towards more of a online store, since there costs are so enormous.

Ratio 2009 2010 2011 Industry AvgProfit Margin 2.2% 2.7% 2.5% 2.4%

Finally in 2011, Best Buy again dipped below the Industry average to a PM of

2.5%. Their revenue increased slightly in 2011, so that was not the problem. It was

that their costs, once again increased, which decreased their net income.

E. Market Value

Market Value Ratios relate an observable market value, the stock price, to book

values obtained from the firm's financial statements. A good ratio is the P/E Ratio,

which indicates how much investors are willing to pay per dollar of current earnings.

High P/E Ratios are associated with growth stock. In this manner, the P/E Ratio also

indicates how expensive a particular stock is.

Ratio 2009 2010 2011 IndustryP/E 15.13 12.79 10.35 12.8

In general, a high P/E suggests that investors are expecting higher earnings growth in

the future compared to companies with a lower P/E. So, in 2009, investors were expecting

growth from Best Buy. Their P/E was well above industry average, at 15.13, so investors were

willing to spend 15.13 dollars for $1 dollar of their current earnings.

However, like each other ratio, in 2010 Best Buy’s ratio slipped to 12.79 and slightly

below industry average. It seems like investors were starting to get worried about Best Buy as a

company as shown by its P/E ratio. Finally, in 2011, Best Buy’s P/E ratio fell even further to

10.35, well below the industry average.

IV. Recommendation and Conclusion

After looking at Best Buy’s past three years of performance, I was shocked to see

that as a company they did not perform way above industry standards. Before doing

this project I would have without hesitation recommended a strong buy on Best Buy.

With their main competitor Circuit City going out of business recently, I would have

thought they would have record profits and be souring high, boy was I wrong.

After completing the 5 ratios for the past three years, it seems like Best Buy is on

the downswing. And to add into the fact to their bad performance, the company’s

CEO Brian Dunn and their Chief Marketing Officer have left the company, the

outlook does not look good.

I think the problem lies with the emergence of Amazon.com and other online

retailers who can offer lower prices then Best Buy, with delivery right to your door.

Best Buy creates a lot of revenue, however they have huge stores and many

employees which cut into their profit drastically.

If I were to become a financial advisor, and my client asked me about Best Buy I

would rate a 5, a strong sell. With their downtrend in almost every ratio I calculated

and the recent dismissal of the CEO, I just don’t see any reason to even hold this

company who may have become just too big.