Best Buy Financial Report
From 1990 to 2000, the demand for computers pushed Best Buy up from $23.63 share to $45 in a period of 10 years (Godwin and Alderman 86). During this period, Best Buy almost overwhelmed the market in terms of store openings. It also faced increased competition not only with such retailers as Wal-Mart, but also from such suppliers as Dell (Godwin and Alderman 86). From 2000 to 2005, stock price of Best Buy increased by nearly 30% at the annual rate (Godwin and Alderman 86). Klawans established that in December 2001, Best Buy’s shares closed at 43.77 which implied a drop of only $3 from December 2000 (19). Analysts indicate that Best Buy’s stock price had been trading in the range of $40-46 between 2000 and 2005 (Klawans 19).
In 2011, Best Buy’s net income dropped by 3%. The key component of Best Buy’s decreasing net income resulted from increase in general and administrative selling (SG&A) expenses. Hitt, Ireland and Hoskisson say that from 2010 to 2011, SG&A increased $452 million equivalent of 4.4% and followed its 2009 to 2010 increase of over 10% (65). While its average revenue growth over the last five years was 10.26%, it slowed to 7.9% in the last three years and became downright sluggish in fiscal year 2011 at 1.16%.
Best Buy’s earnings per share in 2005 were 6.7% less that $.30 per share which was analyzed in the stock market. As a result the company’s stock price as at December 2005 closed at $43.94 an 11.8% decline from its $49.84 closing price on December 2004 (Klawans 19). Klawans noted that “in December 2006 Best Buy’s stock price closed at $51.30, a 4.9% decline from the $53.92 closing price in December 2007” (19). In December 2008, Best Buy’s stock price closed at $44.62, which indicated a 2.5% decline from the $53.29 closing price on December 2008 (Klawans 20).
In 2002, Best Buy’s gross profit was $ 4, 945 million compared to increase in the fiscal year ending in 2003 which was $ 5,871. In 2004, the company reported a growth in gross profit of $6,495 million dollars which further indicated an upward trend in profit of the company. Hitt, Ireland and Hoskisson noted that Best Buy’s domestic sales contribute 74% of total gross revenues of $37.2 billion compared to 13.1 billion from the international segment (65). According to Hitt, Ireland and Hoskisson historical financial reports demonstrate that revenue growth as a percentage of sales in greatest in the international segment of the firm (65). In this context research shows that from 2007 to 2010, international gross revenue increased an average of 15% per year as opposed to less than 6% in the domestic segment. In 2009 the company reported total gross revenue of $45,015 million an amount which increased to $49,694 million in 2010. In 2011 Best Buy revenue further grew to $50,272 million dollars (Hitt, Ireland and Hoskisson 65).
Hitt, Ireland and Hoskisson says that when compared to competitors, Best Buy’s gross profit margin of 25.14% is slightly less than Wal-Mart’s 25.26 percent and better than Amazon’s 22.37% (66). Since the price to earnings ratio uses stock prices, it provides an indication of current investor perceptions of the company. Hitt, Ireland, and Hoskisson noted that “Best Buy’s 2010 price to earnings ratio uses the $32.21 stock price at the close of business in February 26, 2011, the end of the company’s 2010 fiscal year (32.21/3.15 = 10.2)” (66). The obtained ratio of 10.2 shows that a share of Best Buy’s stock was selling for about 10 times earnings per share at the close of its most recent fiscal year. It was a decrease compared to the prior two years.
Proposed Model/Plan
Best Buy should implement its new business model known as customer centricity. Hess says that customer centricity requires Best Buy to adopt a new operating structure, culture, leadership model, and employee training program (86). This move will enable Best Buy to shift to a decentralized structure, where each store will operate as a separate business unit, and each store manager will have control over it. Hess argues that Best Buy analyses customer segment and facilitates its subsequent decision to require all matters concerning capital, inventory mix to be governed by the profitability of the portfolio of its customers (86).
Customer centricity will further enable Best buy to standardize many of its processes across its big box stores to create economies of scale and reduce operating costs. Hitt, Ireland and Hoskisson argues that full implementation of customer centricity will support Best Buy’s entrepreneurial innovations initiated at the store-level (65). It is important to note that with a company culture that values the ability to recognize opportunity and spearhead this model, Best Buy is more likely to develop company policies that allow it to compete successfully with small local competitors both domestically and abroad.
Instilling an owner mentality in each store manager requires financial training. Hess says that “management should be taught how to grow their product mix for profit as well as manage the cost side to maximize margin” (86). Instead of managing traffic, conversion and revenue, store managers will be trained to optimize a customer portfolio and business outcome, and new employees will be trained to customer needs and not only sell products. In conclusion, Best Buy should fully implement the customer centricity model; while at the same time enhancing its online delivery of products to match the competitive pressure of the industry (Hitt, Ireland and Hoskisson 66). As the products become increasingly commoditized and profit margins are reduced hence Best Buy will need to implement the new model to increase share prices and profitability in the industry.
