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Best Buy: Evaluating Growth Opportunities
S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L
Columbia University Graduate School of Business
November 3, 2009
Safe Harbor
Forward-Looking and Cautionary Statements:
This presentation contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the U.S. Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that reflect management’s current views and estimates regarding future market conditions, company performance and financial results, business prospects, new strategies, the competitive environment and other events. You can identify these statements by the fact that they use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “plan,” “outlook,” and other words and terms of similar meaning. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from the potential results discussed in the forward-looking statements. Among the factors that could cause actual results and outcomes to differ materially from those contained in such forward-looking statements are the following: general economic conditions, acquisitions and development of new businesses, divestitures, product availability, sales volumes, pricing actions and promotional activities of competitors, profit margins, weather, changes in law or regulations, foreign currency fluctuation, availability of suitable real estate locations, our ability to react to a disaster recovery situation, and the impact of labor markets and new product introductions on overall profitability. A further list and description of risks, uncertainties and other matters can be found in Best Buy’s annual report and other reports filed from time to time with the U.S. Securities and Exchange Commission, including, but not limited to, Best Buy’s Annual Report on Form 10-K filed with the SEC on 30 April 2008. Management cautions that the foregoing list of important factors is not complete and assumes no obligation to update any forward-looking statement that it may make.
Executive Biography
Ryan Robinson – Domestic CFOSenior Vice-president Finance and TreasurerRyan D. Robinson is chief financial officer, United States, senior vice president of finance, and treasurer for Best Buy Co., Inc., a multinational retailer of technology and entertainment products and services. In this capacity, Robinson oversees the planning, performance management and development of Best Buy U.S. operations. Robinson manages the treasury functions for the global enterprise including capital structure, financing and investing needs. He also oversees the financial matters of several of the company’s emerging businesses, including Best Buy Financial Services, Best Buy for Business, Best Buy Mobile, Pacific Sales and Magnolia stand-alone stores.
Robinson joined Best Buy in 2002 as vice president of finance and treasurer. Robinson previously led the company’s corporate development activities, including mergers, acquisitions and new business ventures as well as the enterprise tax function.
Prior to joining Best Buy, Robinson spent 15 years at ABN AMRO, a leading international bank, most recently serving as senior vice president and director of the company’s North American private equity activities. Robinson also held a number of other management positions in ABN AMRO’s corporate finance, finance advisory, acquisitions and asset securitization divisions.
Robinson earned a bachelor’s degree from the University of Notre Dame and a master’s of business administration from the J.L. Kellogg Graduate School of Management at Northwestern University.
Agenda
1. Best Buy Background
2. The Retail Growth Model
3. Retail Growth Deep Dive – Evaluating New Stores
4. Q&A
C O N F I D E N T I A L - Do Not Duplicate 5
Best Buy Background
1,140 United States
– Best Buy and Best Buy Mobile
– Magnolia Audio Video
– Pacific Sales Kitchen & Bath Centers
205 Canada
– Future Shop
– Best Buy and Best Buy Mobile
171 China
– Five Star Appliance
– Best Buy China
2,450 Europe
– The Carphone Warehouse
– The Phone House
Multiple Web Sites and Call Centers
Source: Company data. Numbers are as at the end of Q2 FY10
World’s Largest Consumer Electronics RetailerFounded in 1966 | Based in Minneapolis, MN
A Long History of Strong Growth
-- in U.S. $ billions --Source: Company public filings
* Non-GAAP operating income rate. Adjusted to exclude restructuring and goodwill impairment charges taken in FY09. Please see appendix.
Best Buy Ranks Among the Largest Retailers in the World
Sales (TTM)Sales / Sq
FtEBIT %
Adj.
EV/EBITDATSR%
$47 billion ~ $860 4.3% 6.8X 52.6%
$403 billion ~ $430 4.3% 7.9X -5.9%
$71 billion ~ $900 2.5% 9.6X 2.1%
$88 billion ~ $2,000 5.3% 9.9X 8.2%
$119 billion ~ $1,700 3.4% 9.8X 14.8%
Source: Bloomberg. Data is U.S. dollars and represents the trailing 12 months in each companies most recently reported period.
C O N F I D E N T I A L - Do Not Duplicate 9
How Do Retailers Grow?
C O N F I D E N T I A L - Do Not Duplicate 10
How Do Retailers Grow?
$45B
FY09 Future
New Distribution Points e.g. New Stores, Concepts, Channels
New Offerings e.g. New Products, Services
New Geographies e.g. International Expansion
C O N F I D E N T I A L - Do Not Duplicate 11
New Store Example– Union Square, NY
Best Buy’s first 24 hour store with all major value proposition elements opening Nov. 13
48,000 square foot former Circuit City Box
High Quality Urban Real Estate, Part of Urban Fill-In Strategy
In addition to Primary Trade Area of approx. 450,000 people; store will serve young, high
income, Urban Trendsetters and Tourists
7th Store in Manhattan bringing Population Per Store to an average of 230,000
Note: Store financials are hypothetical and do not reflect Best Buy’s actual estimates.
C O N F I D E N T I A L - Do Not Duplicate 12
Rigorous Cross-Functional Approval Process Enhances Likelihood of Selecting Most Valuable Investment Options
Strategic Rationale / Fit Financial Evaluation Resource Constraints
• Alignment with Priorities
Low Cannibalization Urban
Isolated Markets
Competitive Positioning
• Reaching New Customers In New
Markets with Relevant Value Proposition
Hispanic Markets
Semi rural / Suburban Markets
• Real Estate Quality e.g. Co-
tenancy, Highway Visibility, Convenience
Facilities,
• Long Term Value Creation
NPV of EVA > 0
IRR > WACC
• Short Term Financial Impact
Y1 Impact to Total Chain Sales
and NOP
• Sensitivity of Financial Outcomes to
change in key variables e.g. Sales
, Margin, Project Cost
• Financial Plan
Available Capital / Resources
Impact to Earnings and Risk
Free Cash Flow
• Rank Project Against Other Investment
Alternatives
Financial Value
Strategic Fit
• Structure of Real Estate e.g. Lease Vs.
Buy Analysis, Risk Mitigation
Investment Decisions are where the strategic “Art” meets financial “Science.”
$12B
$15B
$17B
$19B
$22B
$25B
$27B
$31B
$33B$35B790K
680K
600K
531K
483K
444K404K
367K329K
300K
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Domestic Sales US Pop. Per Store
C O N F I D E N T I A L - Do Not Duplicate 13
US Market Penetration Through New Store Openings Has Contributed Significantly To Growing Top Line and Market Share
357
Stores
~ 13%
Mkt Shr
419
Stores
481
Stores
548
Stores
608
Stores
668
Stores
742
Stores
822
Stores
923
Stores
1,023
Stores
~ 22%
Mkt Shr
• Over the last decade BBY US Store count has increased by almost 190% reducing US population per store by over 60%
• Store ramp up a significant driver of 12% Sales CAGR over this period as well as market share gain of 10%
On Facebook: Search “Best Buy Union Square”
17
Financial Valuation Model
Economic Value Added (EVA)
measures the magnitude of
shareholder value created by a
project. Theoretically, value is
created when EVA greater
than 0
NPV of EVA measures the long term
value of a project by discounting
annual EVA by WACC
Internal Rate of Return (IRR) is a
measure of the efficiency of capital
use NOT value creation. It is the
discount rate at which NPV is 0
IRR of a value creating project
is greater than WACC
If Project A has an EVA of
$10M and IRR of 16%; and
Project B has an EVA of $12M
and IRR of 13%. Project B is a
better project than Project A
Sales
Gross profit
- SG&A
Operating profit
- Taxes
NOPAT
Cash
Inventories
Net PP&E
Op lease capital
Goodwill
Other
Total assets
Vendor payables
Other Curr. Liab.
Debt
Op lease liabilities
Retained earnings
(Repurchases)
(Dividends)
Equity
Total Liab. & Equity
P&L
Balance Sheet
“Operating”
Capital
“Financial”
Capital(Debt + Equity)
NOPAT
- Cap Charge
EVA
NOPAT
10%
(WACC)x
ROIC
- 10% (WACC)
EVA per
$ of Capital = EVAx