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Best Buy (BBY)Stock (Electronics Stores Industry, Consumer Products Industry, Retail Industry)
 Best Buy (NYSE:BBY) is the world's top consumer electronics retailer, with over $40 billion in net sales in fiscal 2008.[1] The company holds approximately 21% of the consumer electronics market in the U.S.[2] and has added approximately 1.5 percentage points onto this portion in the first quarter of 2008.[3] Best Buy's primary competitor in the consumer electronics retailing market is Circuit City. However, since 2006 Circuit City has been struggling, posting a $321 million net loss for FY08[4] and a further $164 million net loss in the first quarter of fiscal 2009.[5] While Circuity City's sales have been plummeting, Best Buy has seized the opportunity to grow its own sales and market share, as BBY's same store sales grew 2.9% in FY08 and 3.7% in Q1 FY09.[6][7] One opportunity Best Buy has identified as it looks for future growth is its installation and repair services to consumers. These services currently represent a small percentage of overall revenue--6% of total revenue[8]--but they are very profitable operations with margins around 10-20%, significantly higher than the company-wide 5.4% operating margin in FY08.[9] An example of Best Buy's attempt to enhance its service offerings is the expansion of its Best Buy Mobile concept, through which Best Buy sells and services cell phones. Another source of growth for the America's largest consumer electronics retailer is international expansion. Best Buy derived 17% of its revenue from sales in its international segment (composed of stores in Canada and China) in FY08; however Best Buy's international operations are not as profitable as their domestic counterparts, as only 7% of the company's operating income came from its international segment.[10]
[edit] Company Overview
Best Buy's sales have nearly doubled in the past five years, from $24 billion in FY03 to $40 billion in FY08[15], while increasing its number of stores from 758 to 1,314. Over the same time period the company has annually earned a gross margin above 23.5% and an operating margin above 5%.[16] Best Buy has posted an increase in comparable store sales annually since 1999.[17] 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.[18] In 2008 17% of Best Buy's sales were in Canada and China.[19] Although its international operations have demonstrated growth (sales increased 37% in FY08[20]), 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.[21] Best Buy is also planning to open stores in Mexico and Turkey by the end of 2010,[22]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[23]. [edit] Operating SegmentsBest Buy operates two main business segments:
Note: All store numbers as of Q1 FY09[33]. [edit] Trends and Forces[edit] Expanding Services to Increase Profit Margins[edit] Geek SquadGeek 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.[34] 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). 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.[35] [edit] Best Buy MobileOne 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.[36] 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.[37] [edit] Home InstallationBest 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. [edit] International Growth: Becoming a Global Leader in Retail[edit] CanadaSince 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).[38] However operating margins in Canada have been considerably lower than U.S. operating margins in the past; 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.[39] [edit] ChinaAs 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.[40] In FY08, China accounted for $1.3 billion of Best Buy's total sales.[41] 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[42] in order to capture a share of the large Chinese consumer electronics market--projected to be over $100 billion by 2010. [edit] EuropeBest 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.[43] 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. [edit] Surviving the Economic Downturn in the U.S. By Stealing Market ShareSince 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[44], Best Buy has continued 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).[45] Best Buy has maintained growth while others have struggled because it has benefited from the troubles of its primary competitor, Circuit City. As Circuit City Stores (CC) struggles, it loses customers, sales and market share to Best Buy. This in turn has kept Best Buy from faltering as many other retailers have since late 2007. [edit] CompetitionA 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, posting a net loss of over $370 million in FY08 and another $164 million net loss in Q1 FY09[48][49]. As Circuit City has struggled, Best Buy has continued to prosper, putting distance between itself and the number two player in the market. In the face of an economic downturn in the U.S. Circuit City's misfortune has allowed Best Buy to pick up sales and continue growing while other retailers have been hurt by a decline in consumer spending. Circuit City's troubles have grown so great that the company has effectively put itself up for sale, opening its books to Blockbuster (BBI) in hopes that the video-rental chain will acquire Circuit City and bolster the failing business.
Note: All figures for fiscal 2008.[50][51] 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.[52][53] 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.
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