INDUSTRY SECTION RECOMMENDATION

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2 COMPANY SECTION The full name of my company is Best Buy Co., Inc. It is a Fortune 100 (#66) corporation and its headquarters is in Richfield, Minnesota. Best Buy s current CEO, Mr. Bradbury Anderson, oversees the operations of this publicly-owned company whose stock ticker symbol is BBY. Best Buy has changed a great deal since its origin in 1966 as a car stereo company. Best Buy s lines of business have expanded to include video games, computer software and equipment, compact discs and DVDs, as well as both small and major household appliances. With over 155,000 employees and $45 billion in annual sales, Best Buy ranks as one of the major players in the Radio, TV, and Other Electronic Stores industry. According to its income statement, Best Buy s sales revenue as of March 2009 (the end of its fiscal year) was $45 billion - an increase of over 10 percent from the previous year. However, net income tumbled from the $1.4 billion reported last year down to $1 billion currently. Much of the drop in income is blamed on the economic recession and the liquidating of inventory from the demise of Best Buy s largest rival, Circuit City. An analysis of several years worth of balance sheets indicates that periods of growth usually coincided with ballooning long-term debt as Best Buy acquired other companies or expanded business lines. Although slowed by a dismal economic climate, Best Buy stands to gain a fair share of Circuit City s customer base which will continue to increase cash flow. However, Best Buy is facing increased competition for customers from retail powerhouses such as Wal-Mart, Target and Amazon. That is why sales growth is only projected to be about 6 percent a year for the next five years. A recent SWOT analysis finds Best Buy s strengths to be strong market presence and financial performance, as well as strategic international acquisitions. Its weaknesses are seen to be a dependence on few suppliers (just five suppliers supply one-third of Best Buy s total merchandise) and a potentially image-marring lawsuit that alleges Best Buy used deceptive and fraudulent business practices on its customers. Best Buy s opportunities are seen to be its recent agreement with Carphone (a major cell phone retailer in Europe), a growing global computer and electronics retail sector, and the opening of dozens of new stores that allow for deeper market penetration. At the same time, threats to the company are increased competition, rising labor wages, and a soaring consumer price index which erodes customer confidence and slows spending. Best Buy stock, like its industry, can be very volatile. Severe increases and declines in value make it a hard stock to analyze on a day-to-day basis. Historically, the stock does yield a strong rate of return about 7 percent over the course of 10 years. Currently, Best Buy stock has been given a four-star rating (five stars being the highest) from Morningstar Investment Research Center. The high rating was given because Morningstar s analyst has determined the stock s Fair Value is greater than the current price. The positive rating is also bolstered by a stewardship grade of a B which means the analyst was pleased with Best Buy s current management. Morningstar s analyst believes that Best Buy will not only survive the downturn in the economy but will emerge stronger because of it. By differentiating itself from its competitors and expanding its presence in international markets, Best Buy should enjoy greater profits once consumer spending levels are restored. In 2008, Best Buy s share of the U.S. consumer electronics market was close to 40 percent. Its nearest single competitor was Circuit City which had just 13 percent of the market. Circuit City declared bankruptcy and was forced to liquidate earlier this year and Best Buy is sure to pick up an even larger share of the U.S. market as a result. Best Buy s target market is the individual consumer between the ages of 35 to 54. It is that section of the market that makes the most purchases. Best Buy spends close to $700 million a year on advertising. It advertises in virtually every medium including newspapers and magazines, radio and TV spots, billboards and trade shows.

3 INDUSTRY SECTION The United States Department of Labor has assigned Best Buy a SIC code of The title for that SIC number is Radio, Television, and Consumer Electronics Stores. The description is as follows: Establishments primarily engaged in the retail sale of radios, television sets, record players, stereo equipment, sound reproducing equipment, and other consumer audio and video electronics equipment (including automotive). Such establishments may also sell additional lines, such as household appliances; computers, computer peripheral equipment, and software; musical instruments; or records and prerecorded tapes. Establishments in this industry may perform incidental installation and repair work on radios, television sets, and other consumer electronic equipment. Establishments primarily engaged in the installation and repair of these products are classified in Services, Industry Establishments primarily engaged in the retail sale of computer equipment are classified in Industry 5734, and those selling electronic toys are classified in Industry The United States Census Bureau has assigned Best Buy a NAICS code of The title for that NAICS number is Radio, Television, and Other Electronics Stores. The description is as follows: This U.S. industry comprises: (1) establishments known as consumer electronics stores primarily engaged in retailing a general line of new consumer-type electronic products; (2) establishments specializing in retailing a single line of consumer-type electronic products (except computers); or (3) establishments primarily engaged in retailing these new electronic products in combination with repair services. According to the Census Bureau s 2002 Economic Census, totals for the industry included 23,521 establishments sharing sales revenue of close to $50 billion dollars. A recent IBIS World Industry report shows that over the past five years, annual sales ceased their upward climb and started retracting. The sales revenue growth rate went from 6 percent in 2004 to a negative 4 percent in Because the industry is sensitive to various consumer indexes, total sales revenue is expected to keep declining through the next year or two. Faced with rising unemployment rates, shrinking household income and an uncertain economic future, consumers may continue to delay consumer electronics purchases they consider frivolous. However, when the economy turns around sometime in the next five years, sales revenue will begin its upward climb again and is projected to reach $100 by RECOMMENDATION I recommend that the LIS613 investment club put some or all of its $10,000 in Best Buy stock. With this recommendation comes a warning that the club should expect investment returns to be poor for the next year or two. With continued high unemployment rates and an unstable economy, most consumers will delay purchasing consumer electronics which they consider frivolous in comparison to staples such as clothing and food. However, the economy should turn around and with more discretionary income consumers will begin making electronics purchases again. Fortunately for our club, the demise of Circuit City means Best Buy will have an even larger share of the industry going forward. A greater market share means a greater share in the sales revenue which generally means higher profits.

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