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Best Buy Company, Inc. Essay

Best Buy began in 1966 as the home and car stereo retailer Sound Of Music, out of Minneapolis, Minnesota. The store expanded slowly until 1980, when “the lights began to turn on” according to Best Buy founder, Richard M. Schulze. Corporate Report Minnesota explains, “Schulze had come to realize that there wasn’t much of a future in a market glutted with vendors, serving a shrinking audience of 15-to-18 year olds with limited resources. ”

Schulze began to offer VCRs and appliances in his Sound Of Music stores. In 1982, when revenues jumped to 9.3 million, the company renamed itself Best Buy and shortly thereafter introduced the local market to the electronics “superstores” retail format. In 1989, the decision was made to make the sales force non-commissioned to offer more self-help product information.

This low-pressure environment is largely responsible for the large market share Best Buy captured from its competitors, including archrival Circuit City. Best Buy has continued to grow at an impressive rate. The Best Buy brand now has 480 stores, with plans to open more. From 1999 to 2001 the company increased revenues by 20% and Earnings Per Share by more than 50%.

Additionally, the company has acquired several companies that it

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believes can be used to leverage Best Buy’s strengths. In 2001 Best Buy purchased Musicland, including its brands of Sam Goody, On Cue, Suncoast, and Media Play. The company has also purchased Magnolia Hi Fi, giving Best Buy and entrance into high-end electronics market. And most recently, the company expanded internationally through the purchase of Canadian retailer Future Shop. Circuit City is a retailer of brand-name consumer electronics, personal computers and entertainment software.

The company sells video equipment, including televisions, digital satellite systems, video cassette recorders, camcorders, cameras and digital video disc players; audio equipment, including home stereo systems, compact disc players, tape recorders and tape players; mobile electronics, including car stereo systems and security systems; home office products, including personal computers, printers, peripherals, software and facsimile machines; other consumer electronics products, including cellular phones, telephones and portable audio and video products, entertainment software and accessories.

Radio Shack (RSH) Radio Shack Corporation primarily engages in the retail sale of consumer electronics through the Radio Shack store chain. As of 2001, the company operated 5,289 company-owned stores located throughout the United States. These locations carry a broad assortment of both private-label and third-party branded products.

The Company’s product lines include electronic parts and accessories, cellular, personal communications system (PCS) and conventional telephones, audio and video equipment, direct-to-home (DTH) satellite systems and personal computers and related products, as well as specialized products, such as scanners and weather radios, among others. The company also provides consumers access to third-party services such as cellular telephone and PCS activation, DTH satellite programming, long distance telephone service, Internet access, prepaid wireless airtime and extended warranties.

Best Buy vs. Competition Revenue Best Buy shows continual growth for the last three years, however Circuit City has kept up the pace in terms of revenue. Surprisingly, the marginal difference in revenue between Best Buy and Circuit City has not changed much. Both of these companies dwarf Radio Shack whose revenue has been stagnant for the last three years. Performance The price to earnings ratio compares the current stock price of a company with its earnings to see if a stock is over or under valued.

This is an important measure because it indicates how investors believe the company will perform in the future. Over the course of the last three years, investors believed that Best Buy would continue to do well in the future, as evidenced by the fact that Best Buy’s P/E ratio has historically been higher than the industry average of 35. More recently, Best Buy’s P/E ratio has dropped below 30. This indicates that Best Buy is not overvalued. In 2001, with net income per share at nearly $2–almost double that of Radio Shack and Circuit City-Best Buy appears to be reasonably valued.

From this graph, we see that Radio Shack has been improving investors’ judgment on it future performance. However, in actuality their net earnings per share dropped, causing its P/E ratio to rise. Historically, Best Buy’s P/E ratio has remained high due to stock value appreciation-not earnings decreases. Return on Shareholder’s Equity measures how much the firm earned on money invested by shareholders. One thing to keep in mind when using ROE analysis is that financial statements show assets at their book value, which is the purchase price minus depreciation.

They do not show replacement costs. A business with older assets should show higher rates of Return On Equity than a business with newer assets. This is one of the reasons Radio Shack, an old company, has high ROE. Radio Shack is considered highly leveraged, which means they have more long-term debt than their competitors. Due to the significant amount of expansion/acquisition and continual growth in all areas in the last several years the consolidated ROE shows Best Buy on the high side. Though Circuit City has more revenue, the amount invested is not producing as much as the other companies.

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