In Focus

Is Best Buy A Smart Buy?

NOTE: All this week in the Chicks' Eye View we will be featuring companies based in the home state of five Chicks -- Minnesota. It's the BIG WEEK of the Chick Fest, which will also be taking place in Minnesota so we thought we'd highlight some home grown businesses. But if you're visiting God's country, beware of the mosquito.

This past Father's Day I was stumped as to what to buy my husband. Whenever such problems arise I resort to thinking about what we could really use, but might be a tad extravagant to buy without a special occasion. Using this process, I found my solution -- a DVD player. This was easy to rationalize; it's something we've often talked about getting and since we work in the entertainment industry, it's practically a job requirement!

After I had made the big purchase and had it all wrapped a week early I started thinking -- what's the fun of getting a new toy that you can't play with? He needed a DVD to go with it! Thankfully, I had been somewhat attentive recently when he had mentioned that he wanted to see the movie "PayBack" with Mel Gibson. Who knew everyone else in town would be renting "PayBack" that week? UGH! Finding that darn movie became my quest. Lo and behold, the Friday before Father's Day happened to be one of those rare occasions where I read the morning paper. For some reason, I found myself paging through a Best Buy advertisement for their current week's sales. My heart leaped: "PayBack" was on sale for $14.99! Off I went with my toddlers in tow. Three Best Buy locations later, I came home empty handed. I told you everyone in town wanted to see this movie.

The next day, in a last desperate attempt, I ran over to my local Tower Records. They actually had it! I grabbed the DVD greedily, sure that I had my hands on the last known copy in the world, and skipped to the check-out counter. The clerk rang it up and my eyes popped as I saw the total: $24.99! What? I'm about to pay twenty-five dollars for a movie we'll surely only watch once? Yep, love is a silly thing, I bought it alright, just to make it a perfect gift. The lesson? Best Buy definitely had the best buy -- I'll be going back.

That was my first trip to Best Buy (NYSE: BBY), but from that visit, I actually learned quite a lot. First of all, in each location, there was always an employee just inside the door offering a friendly greeting and answers to any of my questions. After discovering the "PayBack" slot empty yet again, I was offered a rain check to buy the DVD at the sale price whenever their next shipment arrived. In addition, I wouldn't have to check back periodically, instead they would notify me by mail when the item was in stock (I declined, considering my time crunch!). I was also impressed by the store itself -- very clean and easy to get around. Being a typical chick, I found myself in the DVD player section to compare their prices to what I paid for mine. I was amazed to find that Best Buy and Target actually matched prices! Turns out, my buying our DVD player at Target is indicative of some of the problems Best Buy has been having. Increased competition from stores such as Wal-Mart and Target have certainly taken a bite out of their market share.

Now, if like me, you've never been to a Best Buy, I'll clue you in. Based in Eden Prairie, Minnesota, Best Buy is the nation's number one specialty retailer of consumer electronics, personal computers, entertainment software and appliances. They describe themselves as a "bricks and clicks retailer," offering their customers the best of both worlds, online and offline. The company operates over 420 stores in 41 states, planning to have more than 550 stores nationwide by 2004. They also own and operate subsidiaries including Magnolia Hi-Fi, Media Play, On Cue, Sam Goody and Suncoast, thus offering over 1800 retail stores in the U.S., Puerto Rico and the U.S. Virgin Islands.

As I mentioned, the company faces fierce competition from a number of sources. Obviously, the company competes against other consumer electronics retailers such as Circuit City and Radio Shack. Additionally, they not only compete with the mass merchants I noted above (Wal-Mart, Target, Sears), but also with computer superstores, home office retailers, home improvement superstores, entertainment software superstores and wholesale clubs. You could also argue that they compete with Blockbuster and other video rental stores. Remember, if I'd been able to find a rental copy of "PayBack," I would never have even made it to a Best Buy.

To address the competition, not to mention slowing sales due to the economy, Best Buy made a few acquisitions in the last year or so. The first was a high-end electronics retailer called Magnolia Hi-Fi, Inc., which operates 13 stores in Washington, Oregon and California. I want to get to know this subsidiary, they specialize in providing audio and video home theater systems! Do you think I could rationalize that one as a "job requirement" next Father's Day? The company also acquired Musicland Stores Corporation, one of the largest national retailers of pre-recorded music, videos, books, computer software and other entertainment-related products. Musicland operates 1300 stores in 49 states. The two positives here for Best Buy are the fact that they can add their products to Musicland stores and they can now reach new customers such as mall shoppers and those in rural areas.

I've seen several Best Buy commercials recently focusing on how user-friendly the store is. And I do mean friendly for the user. Their stores are designed to allow their customers to experience many of their products through hands-on displays. Given the current economy, the recent acquisitions, the fierce competition and strong marketing campaign, I pretty much figured the company's numbers would end up disappointing. Boy, do I love when I'm wrong. Okay, their margins aren't quite up to Chicky snuff, coming in at about half the percentage of where we'd like them. Gross margins are 20.4% and net margins are 3.5%, but hey, they're profitable! Their cash versus debt situation and Flow Ratio were phenomenal. I was shocked to see that Best Buy has four times as much cash as they do debt and their Flow Ratio is a lean, mean .80. Now I've not only found a store worthy of a second look, but a stock as well!