Best Buy Company Marketing - Research Paper Example

Page Research Paper Market Report on Best Buy Company Best buy TABLE OF CONTENTS I. Introduction 4 1 Goals 4 1.2 products 4 1.3 Geographic location 4 1.4 Strategies 4 1.5 Market Share 5 1.6 External Driving Forces 6 II. Financial Data 6 III.. Competitive Analysis IV . Current News 9 V. Prediction 9 VI. Conclusion/Recommendation 9 Annex 1 Financial Statement 11 Annex 2 Competitive Analysis table 13 Bibliography 14 Abstract This paper discusses Best Buy Company. The conduct of a market report is needed to understand needs of the customers and to ensure success of the business. Market study helps the company understand business opportunities or failures. Best Buy is a multinational company that carries consumer electronic devices, appliances, mobile phones, and services. It has been successfully operating in all the states and territories of the United States since 1986 but has only started international operations in 2002. Today, it operates in Europe, Mexico, Canada and China under different brands. The company has achieved growth thru mergers and acquisitions, particularly in its international segments. Cost of goods sold is reportedly high in these areas since it entails a lot of maintenance costs. For the past 2 years sales and income have been declining in the international segments while US sales are flat. Business opportunities are seen in the global atmosphere, while opportunities for domestic remain in technology and services. Competitions are taking advantage of their presence in the internet and continue to earn higher income and profits. Amazon and eBay for instance re online retailers that earns high income from internet sales. The declining income of BBC is an eye opener to look if its present business strategies need to be reviewed and changed. Market Report on Best Buy Company I. Introduction Best Buy is a multinational corporation that retails home office products, appliances, entertainment software, consumer electronics, and related services. It operates through variety of brand names that includes Best Buy, The Carphone Warehouse, Five Star, Future Shop, Geek Squad, Magnolia Audio Video, Napster, Pacific Sales and the Phone House. 1.1 Goals. Basic goal of the company which is described in the company’s philosophy is to enrich the lives of its customers in the connected world. Particularly, its goal is emphasized in its strategies: to increase market share, to attain international growth, increase efficiency and to connect to the world. 1.2 Products Best Buy’s stores sell the following items: Consumer electronics, home office, entertainment software, appliances, and services. Consumer electronics consist of video and audio products, TVs, and MP3 players. Home office products include personal computers, cell phones, cable and internet service plan. Entertainment software includes products such as video games, CDS, video games, and computer software. Technology, service and repair. Other segments that offers food and beverages. Source: United States SEC Best Buy Form 10-K Annual Report 1.3 Geographic location Company operates locally in all the states and territories of the United States, while its international scope consists of China, all of European territories, Mexico, and Canada. 1.4 Strategies Strategies that helped company grow are by acquisitions and expansion. The company was incorporated in 1966 with the name Sound of Music Inc. but changed name to Best Buy in 1983. From this beginning it has grown and expanded thru mergers and acquisitions that made an impact of its presence in electronics, entertainment and technological services in the United States. Organic growth began in 2009 when it took advantage of the bankruptcy of Circuit City to serve the market share of the electronics consumers of the industry which was left open by the bankrupt company (University of Oregon Investment Group , Jan 8, 2011 pdf). The international segment started in 2002 through acquisition of established brands in Canada. Its presence in China started in 2007 with a 75% interest acquisition of one of its leading appliances and consumer electronic retail stores. In 2007, Best Buy completely acquired the remaining 25%. Operations in Europe commenced on 2009 thru a joint venture. It acquired 50% controlling interest of Carphone Warehouse (CPW) that operates 2400 stores. CPW is a Phone House store that gives telecommunication services. In 2009, it opened stores in Mexico and in the same year had expanded operations in Canada by opening stand alone stores. Many of its stores abroad are operating under a different Brand name for purposes of brand recall. In China, it operates under the name of Five Star, while in Canada, it operates under the name of Future Shop but the stores are all modified to pursue business model of BBC. This year, company introduced the mobile concept in China and a store-within a store experience in select Five Stores. This concept is based on mix of highly saleable, convenience goods, and accessory products. 1.5 Market share. Analysis of Thomson Reuters (April 2013) show Best Buy’s market share by region in 2013 as 74% in U.S, 11.4% in Europe, 10.7% in Canada, and 3.5% in Canada. It will be observed that the U.S. remains to be its best market. Its growth in the US is high in 2008 to 2009, but dropped in 2010-2011 while international growth in Europe and China remained low. See graph.. 1.6 External Driving Forces 1.6. External driving forces that are beyond the company’s control are mature domestic market, competition from on-line retailers and changing technology. Since industry is considered mature, growth expected is from electronic replacement and technological progress. Electronic replacement cycle is expected every two years due to wear out while technological progress leads to sales of new electronic inventions like 3-D television and smart phones. Sales are influenced by economic fears since the industry is responsive to economic conditions. As they offer non-essential goods, sales are affected by the economic conditions and environments of the place they operate in. II. FINANCIAL DATA SUMMARY (in million US$). Items 2010 2011 2012 2013 Revenues 49,243 49,747 50,705 49,183.6 Net income 1,317 1,277 -1,231 -481.10 Cost of Goods Sold 37,201 37,197 38,113 37,565.5 Source: Bloomberg Businessweek. 2013. BBY Financial Statements As shown, Best Buy’s revenue has shrunk year to year. In 2013, sales declined as compared to 2012. 75% of revenues go to cost of goods sold. Correspondingly, it has also showed income decline in 2012 and 2013. Taxes contributed further to the fall of revenues (See Annex 1. Financial Statements) Quick falling of prices, purchases of inventories, wages of employees keep costs of goods high. Quick falling of prices is seen in as technology becomes widespread Company keeps a lot of inventories which is one of the reasons for a high cost of goods sold. According to UOI Investment Group, (2011) , net profit margin in this kind of industry is normally small averaging only 3%. Net profit margin of BBY is (net profit/revenue): -481.10 /49,183.6 = -0.978%. Net profit margin is scrutinized by stakeholders because a declining profit margin is a symptom of various problems which could be due to poor sales or improper management (Investing Answers. 2013). Fig. 1 presents relationships of revenue, cost of goods sold and net income. Fig. 1. Graphical presentation of Revenues, cost of goods sold and net income The negative decline of income in 2013 according to the BBC Management Report is due to goodwill impairment , restructuring charges, closure of some stores, decline of sales, store transformations, and increased promotional activities both in their domestic and international business segments. Company also made four dividend payments during the year. (BBY 10KT. P. 36). Current ratio for 2013 IS 1.11 that means BBY has the ability to pay its short term obligations. A higher ratio is a healthy sign for the creditors because it shows the company can pay its short term debts while a ratio of less than 1 is an indication of an unhealthy financial condition. A. Competitive Analysis. Its nearest competitors in the industry, namely; Amazon, com, eBay.com, Netfx, Inc., Abercrombie & Fitch Co., and Urban Outfitters, Inc (See Annex 2). As noticed, two of its closest competitors, Amazon and eBay run internet market sales. From among the competitors, Amazon has the biggest 5 year sales growth of 43.75% while BBY has only 1.86% that is the lowest among the group. (SmartMoney, 2012). Projected ESPS Long term growth is biggest for Amazon (576.74%) and lowest for BBY (1.70%). III. Current news BBY as well as other internet retailers are expected to be affected by the bill passed by the Senate on May 2013(BBC News, May 6, 2013) The bill would cut down the advantage of on line retailers and would level it to the local stores who have long complained of unfair business practice of online retailers. IV. Prediction In terms of revenue, it is expected that sales of domestic segment will increase only at a moderate rate because it has reached product maturity. Internal growth will come from technological services since buyers most likely will upgrade their electronics and gadgets. Cost of revenue is expected to decrease as management realized this as the variable that leads to income loss. However, as competition becomes intense, cost of goods sold for on line marketing increases as BBY has to advertise more. Income of BBY has been low for the past 2 years since it has been affected by the bad economy and high costs of operation in Europe. As the economy improves, the closure of some BBY European stores, and the return of BBY to top growth business model, it is expected that its sales and administrative expenses will be lessened. Current ratio has been maintained to 1:1 or 1:2, but it is expected to go down because of increasing sales service that limits inventories. Increases in capital expenditures is seen because of remodeling of stores into a large format stores. It is expected to increase in the next two years before it is settled into a permanent site. V. Conclusion/Recommendation Too much concentration of BBY on organic growth failed to deliver the expected sales performance. As domestic sale is flat, some measures have to be done by BBY in order to maintain its pressure in the US market. A large portion of its revenue comes from this segment, so BBY must keep track of its strategies as it showed a declining net profit margin. Competitors have already gathered dominance on internet sales so BBY must develop this market. Consumers took advantage of on line shopping because they get cheaper goods from the retailer. However, with the introduction of internet taxes, prices will now be comparable to “brick and mortar stores”. This will eventually affect internet sales, but will expand showroom sales because prices will now be same. Comparably, internet prices because of lesser overhead costs than ordinary stores. This comes as an opportunity for BBY since its latest focus is large format stores. The eventual falling of its current ratio of 1:l to less than 0 is harmful because creditors would lack trust to the company. BBY might be on the losing end in its income and revenues, but these are due to finances required in the acquisitions and mergers in the last distant years and the entire COGS attendant to it. As the economy calm down and all the activities that goes along acquisitions stabilizes, I believe the company will return to normalcy and regain its healthy financial position. ANNEX 1 FINANCIAL STATEMENTS Currency in Millions of US Dollars As of: Feb 27 2010 Restated Feb 26 2011 Restated Mar 03 2012 Restated Feb 02 2013 4 Year Trend Revenues 49,243.0 49,747.0 50,705.0 49,183.6 TOTAL REVENUES 49,243.0 49,747.0 50,705.0 49,183.6 Cost of Goods Sold 37,201.0 37,197.0 38,113.0 37,565.5 GROSS PROFIT 12,042.0 12,550.0 12,592.0 11,618.2 Selling General & Admin Expenses, Total 9,622.0 10,029.0 10,242.0 10,365.8 OTHER OPERATING EXPENSES, TOTAL 9,622.0 10,029.0 10,242.0 10,365.8 OPERATING INCOME 2,420.0 2,521.0 2,350.0 1,252.4 Interest Expense -92.0 -86.0 -134.0 -122.2 Interest and Investment Income 53.0 43.0 37.0 36.0 NET INTEREST EXPENSE -39.0 -43.0 -97.0 -86.2 Income (Loss) on Equity Investments 1.0 2.0 -4.0 -4.4 EBT, EXCLUDING UNUSUAL ITEMS 2,382.0 2,480.0 2,249.0 1,161.8 Merger & Restructuring Charges -52.0 -147.0 -58.0 -492.0 Impairment of Goodwill -- -- -1,207.0 -896.7 Gain (Loss) on Sale of Investments -- -- 55.0 19.6 EBT, INCLUDING UNUSUAL ITEMS 2,330.0 2,333.0 1,039.0 -207.3 Income Tax Expense 835.0 779.0 709.0 252.0 Minority Interest in Earnings -96.0 -127.0 -1,387.0 -24.0 Earnings from Continuing Operations 1,495.0 1,554.0 330.0 -459.3 EARNINGS FROM DISCOUNTINUED OPERATIONS -82.0 -150.0 -174.0 2.2 NET INCOME 1,317.0 1,277.0 -1,231.0 -481.1 BALANCE SHEET Currency in Millions of US Dollars As of: Feb 27 2010 Restated Feb 26 2011 Restated Mar 03 2012 Restated Feb 02 2013 4 Year Trend Assets         Cash and Equivalents 1,826.0 1,103.0 1,199.0 1,826.0 Short-Term Investments 90.0 22.0 -- -- TOTAL CASH AND SHORT TERM INVESTMENTS 1,916.0 1,125.0 1,199.0 1,826.0 Accounts Receivable 2,020.0 2,348.0 2,288.0 2,704.0 Inventory 5,486.0 5,897.0 5,731.0 6,571.0 Other Current Assets 418.0 842.0 245.0 355.0 TOTAL CURRENT ASSETS 10,566.0 10,473.0 10,297.0 12,047.0 NET PROPERTY PLANT AND EQUIPMENT 4,070.0 3,823.0 3,471.0 3,270.0 Long-Term Investments 324.0 328.0 140.0 86.0 Goodwill 2,452.0 2,454.0 1,335.0 528.0 Other Intangibles 438.0 336.0 359.0 334.0 Other Long-Term Assets 433.0 337.0 350.0 456.0 TOTAL ASSETS 18,302.0 17,849.0 16,005.0 16,787.0         LIABILITIES & EQUITY         Accounts Payable 5,276.0 4,894.0 5,364.0 6,951.0 Accrued Expenses 2,187.0 2,006.0 1,620.0 1,575.0 Short-Term Borrowings 663.0 557.0 480.0 596.0 Current Portion of Long-Term Debt/Capital Lease 35.0 441.0 43.0 547.0 Other Current Liabilities 38.0 35.0 135.0 133.0 TOTAL CURRENT LIABILITIES 8,978.0 8,663.0 8,855.0 10,810.0 Long-Term Debt 1,104.0 711.0 1,685.0 999.0 Capital Leases -- -- -- 154.0 Minority Interest 644.0 690.0 621.0 654.0 Other Liabilities, Total 1,256.0 1,183.0 1,099.0 1,109.0 TOTAL LIABILITIES 11,338.0 10,557.0 11,639.0 13,072.0 Common Stock 42.0 39.0 34.0 34.0 Additional Paid in Capital 441.0 18.0 -- 54.0 Retained Earnings 5,797.0 6,372.0 3,621.0 2,861.0 Comprehensive Income and Other 40.0 173.0 90.0 112.0 TOTAL COMMON EQUITY 6,320.0 6,602.0 3,745.0 3,061.0 TOTAL EQUITY 6,964.0 7,292.0 4,366.0 3,715.0 TOTAL LIABILITIES AND EQUITY 18,302.0 17,849.0 16,005.0 16,787. Source: Bloomberg Businessweek 13 February 2013. Annex 2. Competitive analysis Best Buy Co. Inc. Amazon.com Inc. eBay Inc. Netflix Inc. Abercrombie & Fitch Co. Urban Outfitters Inc. Industry General Retailers General Retailers General Retailers General Retailers General Retailers General Retailers Current Share Price 25.31 264.51 55.33 229.38 53.48 43.75 Market Value $8,618 mil $120,016 mil $72,222 mil $12,223 mil $4,209 mil $6,409 mil Revenues $49,143 mil $61,093 mil $14,028 mil $3,609 mil $4,511 mil $2,795 mil Net Earnings $-459 mil $-39 mil $2,609 mil $17 mil $237 mil $237 mil 5-yr Sales Growth 1.83% 43.75% 12.85% 32.90% 5.48% 10.47% 5-yr Earnings Growth -31.97% -21.15% 9.31% -15.59% -1.31% 7.73% Net Profit Margin -0.49% -0.14% 18.72% 0.65% 5.25% 8.49% Short Interest 2.17 1.88 1.09 2.27 2.25 1.80 Proj. Long-Term EPS Growth (%) 1.70% 576.74% 17.45% 490.13% 12.23% 15.25% Forward P/E 11.48 199.72 20.24 146.10 15.56 23.07 PEG NA 3.54 1.30 1.65 0.86 1.27 Price/Sales 0.17 1.87 4.97 3.24 0.98 2.28 Price/Cash Flow 11.98 697.09 24.41 -259.47 14.82 27.82 Price/Book 1.78 13.90 3.16 6.91 2.20 4.61 ROE NA -1.12% 13.65% NA 13.57% 19.85% ROA -1.51% -0.35% 8.28% 0.64% 8.18% 14.49% Dividends $0.17 NA NA NA $0.20 NA Dividend Yield 2.69% NA NA NA 1.50% NA Payout Ratio NA NA 0.00% 0.00% 24.56% 0.00% Total Return (12-mos) 30.12% 18.72% 37.49% 198.05% 16.53% 61.95% Total Return (3-yr) -39.17% 105.31% 145.85% 115.68% 34.36% 21.56% Beta 0.27 0.24 0.24 0.19 0.28 0.25 % Off 52-wk High 5.98% 7.10% 4.67% 0.14% 1.33% 1.26% Bibliography BBC News (May 6, 2013). Online sales tax plan approved in US Senate. Retrieved from BBY 2013 10KT Final Transition Report. Retrieved from US Securities & Exchange Commission. Pdf pp. 1-116. Bloomberg Businessweek 13 February 2013. BBY Consolidated. Retrieved from Investing Answers (2013). Net profit margin. Retrieved from Smart Money (2012) .BBY Competitive Analysis. Retrieved from Thomson Reuters.( 02 April 2013)“ Best Buy’s US market dominates in share, growth” . Retrieved from University of Oregon Investment Group,( Jan 8, 2011), pdf. Retrieved from < uoinvestmentgroup.org/wp-content/uploads/2011/01/BBY.pdf> US Securities & Exchange Commission. Form 10-K Best Buy Annual Report. Pdf. Read More