Best Buy (NYSE:BBY) is the largest U.S. consumer electronics retailer by revenue, with $40 billion in net sales in fiscal 2008. However, the global economic slowdown has affected consumer behavior creating a difficult climate for the sale of electronic devices, which tend to be discretionary purchases susceptible to downturns. Best Buy's primary competitor in the electronics retailing market, Circuit City, has been struggling since 2006, posting a $321 million net loss for FY08 and filing for bankruptcy in November 2008. Although Best Buy stands to benefit by taking Circuit City’s market share, the economic malaise has been resulting in lower-than-expected revenue for the consumer electronics giant. The strengthening of the dollar has also hurt revenue and profits tied to the company's international segment - operating margins for the international segment were 2.4% in 2008 compared to 5.4% company-wide.  However, Best Buy has had significantly higher operating margins from its Installation and Repair Services segment, 10-20%, because it is not as sensitive to recessions since most people at least occasionally have trouble with electronics and its services are regarded more as a necessity than a commodity, allowing the company to raise prices.
Best Buy is the largest U.S. specialty consumer electronics retailer with approximately 21% of the consumer electronics market in the U.S. and has added approximately 1.5 and 1.6 percentage points onto this portion during the first and second quarters of 2009. Revenue in fiscal 2008 increased 11% to $40 billion, from $35.9 billion in 2007; net earnings rose to $1.4 billion, a 2% increase from $1.37 billion in 2007. These increases reflect the market share gains and the addition of new stores; Best Buy's sales have nearly doubled in the past five years, from $24 billion in FY03 to $40 billion in FY08, while increasing its number of stores from 758 to 1,382.
The company went international in 2001 with the acquisition of then-market leader, Future Shop and then entered China in 2006 by acquiring Five Star Appliances. The majority (41%) of the company's sales are from consumer electronics, a category including products such as DVD players and televisions. In 2008 17% of Best Buy's sales were in Canada and China. Although its international operations have demonstrated growth (sales increased 37% in FY08), its international operations are less efficient than their domestic counterparts, earning only a 2.4% operating margin in 2008 compared to the domestic 6.0% operating margin. Best Buy is also planning to open stores in Mexico and Turkey by the end of 2010,and it formed a joint venture with Carphone Warehouse, Europe's largest retailer of mobile phones, that will open new Best Buy stores in the United Kingdom and other European countries.
Best Buy operates two main business segments:
The domestic segment covers all of Best Buy's retail stores in the United States which include Best Buy, Magnolia Audio Video, Geek Squad, Best Buy Mobile, Pacific Sales Kitchen and Bath, and Speakeasy. In fiscal 2008, the domestic segment contributed 83% of net sales. However, the domestic segment's sales grew 7% in FY08, much slower than the 37% increase in the international segment.
This segment consists of Canadian and Chinese operations which include Best Buy, Future Shop, and Geek Squad in Canada and Jiangsu Five Star Appliance and Best Buy in China. The international business contributed 17% of total revenue in FY08. Sales growth has been strong internationally as net sales increased 37% and comparable store sales abroad grew 9% in FY08.
|Store Name||Store Type||Locations in US||Locations in Canada||Locations in China||Year Acquired|
|Best Buy||Consumer Electronics and Services||973||52||2||N/A|
|Future Shop||Consumer Electronics and Services||0||133||0||2001|
|Geek Squad||Computer Technical Services||7 (standalone)||0||0||2002|
|Best Buy Mobile||Cell Phone Sales and Services||21 (standalone)||0||0||2008|
|Magnolia Audio Video||Home Theater and Related Services||13 (standalone)||0||0||2000|
|Pacific Sales Kitchen and Bath||Home Remodeling Products and Related Services||22||0||0||2005|
|Jiangsu Five Star Appliances||Appliances and Consumer Electronics||0||0||161||2006|
|Speakeasy||Information Technology Service||0||0||0||2008|
Note: All store numbers as of Q2 FY09.
Since the middle of calendar year 2007, the domestic economy has been struggling and consumers have become more cautious with their discretionary spending on unnecessary items such as flat-screen televisions and video games. While other retailers of non-necessary goods, such as Dick's Sporting Goods whose same store sales fell 3.8% at its namesake chain in the first quarter of FY08, Best Buy managed to post increases in net and same store sales (net sales were up 13% and same store sales grew 3.7% in the first quarter of FY09). In November 2008, Best Buy’s primary competitor, Circuit City, filed for bankruptcy, leaving BBY to benefit by gaining market share. However, the economic slowdown has really affected consumer behavior and created a difficult climate for Best Buy. Even though Best Buy’s primary competitor has filed for bankruptcy and it expects an increase in sales and earnings from this, it still expects 4Q 2009 results to fall 5 to 15 percent. Best Buy’s same-store sales fell 7.6 percent in October 2008, after a 1.3 percent decline in September 2008. Although during 3Q 2009 its sales increased nearly 16 percent to $11.5 billion, net earnings fell 77 percent from $228 million a year ago to $52 million.
Geek Squad is Best Buy's specialty computer and consumer electronics technician service subsidiary. In addition to having a Geek Squad within all domestic Best Buy retail stores and most Canadian Best Buys, there are 7 stand alone Geek Squad retail stores throughout North America. Geek Squad sales were not broken out in FY08, but made up a small percentage of revenue in fiscal 2007 (less than 4%). However the business helps to boost profits because of its high operating margin (estimated to be in the 10-20% range); also consumers, even in times of economic turmoil, demand assistance with their new or existing gear. Best Buy cut down its number of standalone U.S. Geek Squad locations from 12 to 7 in FY08 as all U.S. Best Buy stores opened in-house Geek Squad areas.
One of Best Buy's newest concepts, the company has put a significant emphasis on Best Buy Mobile in an effort to enter the business of selling and servicing cellular phones. Best Buy Mobile was launched at the end of FY07 and at the end of the first quarter of FY09 the company operated 14 stand-alone Best Buy Mobile locations in addition to 599 in-store Best Buy Mobile concept areas. Best Buy launched a joint venture with Carphone Warehouse, Europe's largest cell phone retailer, in a joint venture to launch Best Buy Mobile and Best Buy stores in Europe.
Best Buy offers home installation through several venues: Best Buy in-store employees, Magnolia Audio Video stand-alone stores, and Magnolia Home Theater centers within Best Buy stores. Most of Best Buy's installation sales come from consumers who desire installation services for their newly purchased home theater products such as flat-screen TVs and surround sound audio systems. Home installation, like Geek Squad sales, makes up a very small portion of total revenue (less than 4%) but is a high margin business.
Since Best Buy bought Future Shop in 2001 and began opening Best Buy retail stores in Canada, its stores have struggled to produce results comparable to its US counterparts. However, Best Buy's Canadian operations have improved compared to U.S. stores. In FY07 Canadian operations generated approximately $22 million per store and in FY08 this figure increased to $29 million (U.S. stores generated $34 million per store on average). However operating margins in Canada have been considerably lower than U.S. operating margins in the past, primarily because of the increased sales of lower-margin products; in fiscal 2007 Best Buy's overall domestic operating margin was 5.8% while its operating margin in Canada was only 1.7%. However, conditions have improved as Best Buy's international operating margin rose from 2.0% in FY07 to 2.4% in FY08.
As the leading consumer electronics retailer in the United States, Best Buy is attempting to become a major competitor in the consumer electronics market in China. Best Buy took its first step in 2006 by acquiring China's third largest consumer electronics and appliance retailer, Jiangsu Five Star Appliances, which generated over $700 million in revenue in 2005. At the end of the first quarter of fiscal 2009 there are 161 Jiangsu Five Star stores in China, up from 135 at the end of FY07 and 160 at the end of FY08. In FY08, China accounted for $1.3 billion of Best Buy's total sales.
Best Buy has been using Jiangsu as a means to learn about the retail industry and culture in China, and the company opened its first Best Buy retail store in Shanghai in December of 2006. Best Buy plans to open more of its namesake retail stores throughout China in fiscal 2008 in order to capture a share of the large Chinese consumer electronics market--projected to be over $100 billion by 2010.
Best Buy announced in May 2008 that it was forming a joint venture with Carphone Warehouse, Europe's largest cellphone retailer to open Best Buy stores in the United Kingdom and Europe. Best Buy will receive support from Carphone Warehouse in this expansion project in return for approximately $2.15 billion in cash from Best Buy. The first new stores are expected to open in 2009, after which the venture will expand with new stores throughout Europe. Larger format stores will operate under the Best Buy brand while smaller locations will continue to exist under the Carphone Warehouse name.
The value of the dollar has a direct affect on Best Buy’s international investments. If the dollar strengthens, the currency effect lowers the return. Conversely, if the dollar weakens, the investment return increases. BBYs stores in Canada are paid in canadian dollars while stores in China receive the yuan, when these currencies are then traded for US dollars, depending on the exchange rate, the return can either increase or decrease.
Favorable fluctuations in foreign currency exchange rates (strengthening of the yuan and canadian dollar to the U.S. dollar) in fiscal 2008 contributed to Best Buy’s 37% revenue increase in its international segment.  The U.S. dollar’s change in value to the yuan and canadian dollar accounted for more than $500 million, or more than 30% percent of the revenue increase. However, the U.S. dollar has appreciated to these currencies during fiscal 2009, which will result in lowering Best Buy’s returns from its international operations in fiscal 2009.
As the largest consumer electronics retailer in the United States, Best Buy will likely take a majority of the $1 Billion in expected revenue from converter box sales around the time of the Analog to Digital Television Transition date of February 17, 2009.
In August 2008, Best Buy announced that it will become the first third-party retailer to sell Apple's 3G iPhone. Until the deal was announced, the iPhone was only available through the phone's manufacturer, Apple, and the network carrier for the device, AT&T. The iPhone is Apple's newest hot product, selling over 1 million units in the first three days of the release of the 3G version in July 2008. Best Buy will begin selling the iPhone in its namesake and Best Buy Mobile stores in September 2008 and the revolutionary product's popularity could significantly drive foot traffic during the back-to-school and holiday shopping seasons.
A broad set of companies compete in the consumer electronics retail market, but Best Buy's most direct competition comes from Circuit City Stores (CC), the second largest specialty consumer electronics retailer behind Best Buy. Since fiscal 2006 Circuit City's business has been floundering, and after posting a net loss of over $370 million in FY08 filed for bankruptcy in November 2008. The economic downturn in the U.S. has made it difficult for consumer electronics retailers to post any gains, including Best Buy; however, it stands to gain market share through Circuit City's misfortune.
|Company||Total Revenue (mm)||Sales Growth (Decline) from FY07||Gross Margin||Operating Margin||Net Income (loss; mm)||Same Store Sales Growth (Decline)|
In addition to Circuit City, Best Buy faces considerable competition from retail monolith Wal-Mart Stores (WMT). The company's $378 billion in sales in fiscal 2008 make Wal-Mart the largest retailer the world and its $92.2 million in gross profit more than double Best Buy's $40 billion in revenue. Wal-Mart Stores (WMT) doesn't break out its sales for product categories, so it's not possible to compare the two businesses directly, but electronics are estimated to be a major portion of Wal-Mart's business and with $378 billion in sales, it would be highly significant if only 1% of the business was from electronics.
Best Buy also competes with other general discount and wholesale retailers, such as Target (TGT) and Costco Wholesale (COST), direct retailers such as Dell (DELL), which sells consumer electronic products directly to customers, as well as retailers that focus on one market, like Gamestop (GME) in the video game sector.