Best Buy Research Report Final

Applied Portfolio Management Jeffrey B. Mann, CFA Research Report: Best Buy Co., Inc.

Ticker: BBY Recommendation: BUY Current Price: $22.33 12-Month Price Target: $29.88

Highlights: Why Best Buy is the in Consumer Cyclicals

• Dominant 47% Market Share in Consumer Electronics Industry: Best Buy is able to benefit from economies of size and scope, allowing them to purchase a wide variety of merchandise at discounted prices. They are able to pass these cost savings on to consumers via lower product prices.

• Strong Free Cash Flow and Massive Repurchase Program: Despite doomsday scenarios abound, Best Buy generated Free Cash Flow of $2.323 billion for fiscal 2012, reflecting a 29.58% Free Cash flow to Enterprise Value yield. With a strong commitment to generating shareholder value, Best Buy spent $1.5 billion on share repurchases, reducing share count by 16.6%.

• Bear thesis overstates risk: Despite slowing same-store sales and the threat from online retailers, Best Buy has balanced slowing growth in DVD and Television sales by investing in high growth Mobile Best Buy while shedding excess costs by closing unprofitable big box stores and planning smaller store formats. New pricing policy from television manufacturers designed to benefit brick-and-mortar by penalizing retailers from selling below MSRP1.

• Growth Opportunities: Best Buy Mobile to grow store locations by 33% this year. Current profits of $260 million expected to grow 15%. Expected online domestic revenue to grow 20% with $4 billion in sales projected for fiscal 2016. 50 new Five Star stores to open in China with expected sales of $4 billion by fiscal 2016.

• Takeover Target: Dominant market share and valuation relative to cash flow make Best Buy a prime target for private equity takeover.

1 Source: Appendix V: Field Research – James K. Willcox

(in $ millions) 2012A 2013E 2014E 2015E 2016E 2017ESales $50,705 $50,705 $50,705 $53,271 $55,966 $58,798EBITDA 3,295 3,448 3,701 4,155 4,365 4,586Net Income (1,231) 1,530 1,740 2,056 2,201 2,354EPS (3.36) 4.98 6.64 9.48 12.80 18.53

Forecast Summary

52-week Price Range $21.21 - $32.85 Insider Holdings 20.00%Average Volume (3m) 7,437,200 Institutional Holdings 91.00%Beta 1.22 FMR LLC 10.33%Market Cap (thousands) 7,570 Tradewinds Global 5.08%Shares Outstanding 347.5 million GREENLIGHT CAPITAL 2.20%Debt/Total Cap 10.00% EV/Sales 0.16ROE 30.00% EV/EBITDA 2.50Free Cash Flow/EV 29.58% P/E 6.04

Market Data

BBY Research Report April 28, 2012

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Company Overview

History: The history of Best Buy goes back to 1969, when Richard Schulze, along with a partners established Sound of Music, a Minnesota home/car stereo store. In 1971, Schulze bought out his partners and expanded the chain. In the early 1980s, Schulze broadened his product line and targeted older, more affluent customers by offering appliances and VCRs. To set himself apart from its competitors, Schulze introduced the warehouse-like store format and Best Buy was born. Overview: Today, Best Buy Inc. (NYSE:BBY) operates consumer electronics stores in the U.S., Canada, Mexico, Europe and China. They generate revenues through sales of consumer electronics, home office products, entertainment products, appliances and related services. They offer a unique multi-channel model which provides customer access through retail store locations, web sites, mobile applications and call centers. The business is seasonal and has historically realized greater revenues and profits during the fourth quarter holiday season. Geographically, 74% of its revenues are generated from US Domestic Operations, while the remaining 26% comes from International Operations. Business Segments: Best Buy is the dominant player in the Consumer Electronics Store segment in the US. With 47% market share, they are able to benefit from economies of scale and scope. This allows them to purchase a wide variety of consumer electronics, computing and mobile phones, entertainment hardware and software, and appliances at discounted prices. Consumer electronics encompass televisions, cameras, camcorders, and e-readers. Computing and Mobile Phones encompass sales of mobile phones and mobile computing as well as mobile connections. Entertainment includes video gaming hardware and software, CD’s and DVDs. Appliances include small appliances and kitchen appliances. Recent Developments: As sales have slowed Best Buy has initiated an actionable plan to reposition the business. In order to improve margins they have introduced an $800 million cost reduction program. This will affect US operations as they plan on closing 50 Big Box retail locations resulting in $300 million in savings. Additionally they will trim the corporate structure by $300 million and lower cost of goods sold by $200 million by implementing supply chain efficiencies and reducing headcount by 400. Stores: On the store front, Best Buy will be decreasing square footage while increasing points of presence for increased flexibility. As mentioned previously, they will be closing 50 Big Box stores in the US while opening an additional 100 Best Buy Mobile locations. This will have an immediate impact on profit margins through reduced costs of unprofitable stores while they expand high Best Buy Mobile. Currently, Best Buy Mobile generates over 260 million in Net Profit. US connections grew by 28% to over 7 million last year and Best Buy Mobiles market share for the US mobile retail market stands at 5%. Best Buy currently has 305 mobile retail locations and is targeting 600 to 800 stand-alone stores by 2016 with an expectation of securing 10% market share in the US mobile retail market. This high growth segment offers a significant margin of safety in balancing any continued slowdown in the consumer electronics and entertainment segments. In addition, Best Buy has closed big box pilot stores in the U.K.


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due to the difficult macro environment, in order to refocus Best Buy Europe on 2,400 small store formats. Best Buy will be also be introducing a new Connected Store Format before the holiday season with remodeled big box stores focusing on connections, services and multi-channel experience. The new stores will closely resemble the apple store format and aims to enhance the customer experience and target higher growth, higher margin products and services. Growth Initiatives: Best Buy is targeting 4 key growth initiatives in order to drive the business going forward: e-commerce, connections, services and China. In order to compete effectively with online retailers, Best Buy is driving online sales. In March, they hired former Starbucks chief information officer Stephen Gillett as president of Best Buy Digital and Global Business Services. His aim is to enhance the digital retailing experience while not taking away from physical retail sales. Domestic online revenue grew by 20% in 2012 and is expected to reach $4 billion by 2016. Connections have grown 11% in fiscal 2012 and are targeted to grow another 15% this year, driven by mobile phone growth and increased connections in tablets and computing. Best Buy is able to make profits on a % of lifetime value attributed to the carrier such as AT&T or Verizon, cable, and or DirecTV2. This gives them a significant competitive advantage as they are able to drive customer acquisition by discounting phones and other devices. Revenue from Domestic services is expected to grow 10% in fiscal 2013, driven by plans to expand customer benefits under the Rewards Zone Silver loyalty program, whose members account for a significant percentage of the company’s profit. Key enhancements include, free expedited shipping, premier access to major products and sales events, free house call from the Geek Squad, and a 60-day no hassle returns and price-match policy, all key in challenging the threat from online retailers. The fourth key growth initiative focuses on the China market. Best Buy plans to open 50 new Five Star stores in fiscal 2013, including 14 new mobile store-within-a-store concepts, with a target of $4 billion in sales by 2016. Company Management: Best Buy is currently undergoing an executive search for a new CEO after Brian Dunn, a 28 year old veteran resigned due to allegations of personal misconduct. The current interim CEO is Mike Mikan, former executive vice president and chief financial officer of UnitedHealth Group Inc.

Industry Analysis The consumer electronics store industry is in the mature phase of its life cycle. Prior to the recession, the industry benefited from increased household wealth, innovative product offerings and a secular shift to flat screen televisions. The collapse of the housing market, followed by the recession dealt a blow this industry along with the rest of the economy. Consumer confidence has yet to recover which has forced unprofitable industry players to exit the market. Notably, Circuit City exited in 2009 due to reduced demand for the industry. 2 Source: Appendix V: Field Research - Adam Hauser


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Our Porters Five Forces3 and SWOT4 analyses demonstrate that Best Buy is the industry leader in consumer electronics as a result of its massive store presence with 1100 Big Box Stores in the US and 305 Best Buy Mobile Stores. With its large scale, Best Buy is able to extract price discounts from manufacturers which results in reduced prices for consumers. All though customers have high bargaining power, Best Buy is able to offer the most competitive prices due to its scale advantage. Threat of new entrants is low for the consumer electronics stores as high capital requirements are necessary, coupled with a consolidating industry and low profit margins. The real threat to Best Buy is that of substitutes. Consumers have been increasingly flocking to online retailers such as Amazon to purchase consumer electronics at reduced prices. Online retailers are able to offer tax free purchases in some cases, along with free shipping. However, a recent survey by the NPD Group5 shows that while most consumers research consumer electronics products online before purchasing, only certain products are likely to be purchased online. Notably, Televisions, Smartphones and Camcorders were least likely to be purchased online. All products where Best Buy dominates or is growing. Competition:

Source: WWW.IBISWORLD.COM

Amazon.com is an online retailer that generates revenue from the sale of a wide range of products and services to customers. The products offered on consumer-facing websites primarily include merchandise and content they have purchases for resale from vendors and those offered by third-party sellers, in addition to self-manufactured Kindle sales. North American net sales of $17,315 billion in 2011, were in the electronics and other general merchandise category. While unable to extract other general merchandise data, it is clear that Amazon.com is a major competitor to Best Buy.

3 Source: Appendix III: Porter’s Five Forces 4 Source: Appendix IV: SWOT Analysis 5 Source: Appendix VI: NPD Group Survey

47%

6%

47%

Major Players (Market share)

Best Buy

RadioShack

Others

http://www.ibisworld.com/


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RadioShack is a consumer electronics retailer with three product lines in 7,200 locations. The Mobility Platform includes postpaid and prepaid wireless handsets, commissions and residual income, prepaid wireless airtime, tablet devices, and e-readers. The Signature Platform includes home entertainment, wireless, computer, and music accessories; general purpose and special purpose power products; headphones; technical products; and services. The consumer electronics platform includes laptop computers, personal computing products, digital music players, residual telephones, GPS devices, cameras, digital televisions, and other consumer electronics products. Net sales for 2011 totaled $4,378 billion. Target is a retail store with net sales of $69,865 in 2011. The Hardlines segment accounts for 19% of sales and includes electronics, music, movies, books, computer software, sporting goods and toys. While unable to extract non-comparable data on sporting goods and toys we estimate that Target is a significant competitor to Best Buy. Of note, the Hardlines segment has declined from 22% of sales in 2009 to 19% in 2011. We estimate that this is due to the weak economic environment and low consumer confidence. Wal-Mart Stores is the largest retail company in the world, operating walmart stores and Sam’s club outlets. Walmart’s U.S. segment had net sales of $264,186 billion in 2011, of which 12% constituted the Entertainment Segment, including electronics, toys, cameras and supplies, photo processing services, cellular phones, cellular service plan contracts and prepaid service and books. Sam’s Club Segment had net sales of $53,795 billion, of which 8% constituted, the Technology, office and entertainment category, and included electronics, wireless, software, video games, movies, books, music, office supplies, office furniture and photo processing. While unable to extract non-comparable data on toys and office furniture we estimate that Walmart stores and Sam’s Club outlets are large competitors in the consumer electronics market.


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Financial Statement Analysis

Best Buy experienced losses in three categories in the Domestic Segment in fiscal 2012. These include, gaming and DVD sales within the Entertainment category. We expect DVD sales to continue to decline as there is a shift to streaming video. However, Best Buy has been offering trade-in discounts for games and reward zone memberships for frequent video game customers. In addition, they have seen declines in digital imaging and television within the consumer electronics category. We continue to believe that there has been a weakness in consumer confidence that has weighed heavily on big ticket items such as televisions. Any strength in the economy will have a positive effect on this category. These losses were


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partially offset with gains in the computing and mobile phones category, and appliance category. As mentioned previously we expect connections and the mobile category to grow 15% this year, more than offsetting any continued weakness in consumer electronics and entertainment. Also of note, the international segment is showing continued resiliency despite the weak macro environment and we expect flat growth with potential upside form investments in China. In analyzing competitors we chose companies with the greatest near-term and long-term threat to Best Buy. Walmart and Target represent similar physical retailers with the scale and presence to compete with Best Buy at the most traditional level. As outlined in our Porter’s five forces analysis, online retail and most notably, Amazon continue to be the largest long-term threat to Best Buy.

Inventory turnover has been steady over the last five years for Best Buy and comparable to traditional retailers while Amazon has seen decreasing turnover. While revenues have been slowing Best Buy has been able to efficiently manage inventory levels downward. Conversely, Amazon has seen decreasing inventory turnover which may indicate inefficient inventory management and/or product obsolescence.

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Accounts payable turnover has remained steady over the last five years for Best Buy and comparable to Target. Walmart is significantly higher, as a result of its large scale and ability to stretch out payments to vendors. We noticed that Amazon was significantly lower which may signal inefficient cash cycle management due to its large scale and potential ability to demand concessions from vendors.

Total Asset turnover is above the entire peer group over the last five years for Best Buy indicating an efficient deployment of assets to generate sales. This is especially significant given the fact that all comparable companies operate with low profit margins indicating superior performance for Best Buy.

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Long-term Debt to Equity is the lowest of the entire peer group for Best Buy over the last 5 years indicating ability to fund the business from cash flow from operations with limited need for additional financing. Low net debt balance allows financial flexibility and ability to withstand industry downturns.

Return on equity has been steady and at the high end of the peer group over the last five years. This signals superior management at Best Buy. They are able to efficiently allocate capital through share repurchases and effectively increase shareholder value.

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Return on assets has been trending downward for the entire peer group over the past five years with Best Buy outperforming. This signals superior outperformance at Best Buy especially compared with online retailer Amazon, which generally operates with less fixed assets.

Current ratio and quick ratio has been in line with the entire peer group for Best Buy over the past five years indicating ability to meet short-term obligations. You will notice Walmart at the low end for both ratios which indicates its strength in stretching out payments to vendors.

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The financial ratios we analyzed all point to comparable or superior performance for Best Buy compared to peers. However, we currently see a wide divergence in P/E multiple compared with competitors. We feel this price multiple offers a significant margin of safety and significant upside.

We also analyzed changes in shares outstanding over the past five years. Physical retailers have been repurchasing shares indicating management views them as undervalued. In addition, Amazon has been issuing shares indicating management views them as overvalued.

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Valuation To arrive at our long-term target price, we utilized a discounted cash flow model in conjunction with a comparable multiple analysis. Our comparable multiple analysis consisted of a price to earnings multiple and an EBITDA multiple. We weighted each factor by 33.33%. To arrive at our earnings per share forecast of $4.98 we estimated flat revenues and applied a reduction in expenses of $250 million attributed to the multi-year cost reduction initiative. We also factored in share repurchases of $750 million at a price of $22.30. The P/E multiple value yielded a price of $59.76 when multiplied by the industry average 12.0x multiple for physical retailers of similar size.6 Our comparable analysis utilizing the EBITDA multiple yielded a price of $68.31 based on an industry multiple of 7.2x and a 2012 EBITDA forecast of $3,448 billion.7 We used brick-and-mortar competitors that are in many respects similar to Best Buy in terms of profitability and business segments. Figure 16: Comparisons Across Peer Group

Selected Comparables

Company Name Market Cap EV/

Revenues EV/

EBITDA Gross

Margin EBITDA Margin

ROE %

Wal-Mart Stores Inc. 200.8 0.6x 7.1x 25% 8% 22% Target Corp. 37.8 0.8x 7.3x 29% 11% 19% Best Buy Co. Inc. 7.4 0.2x 2.3x 25% 7% 20% Mean 0.7x 7.2x 27% 10% 21% Median 0.7x 7.2x 27% 10% 21%

Our discounted cash flow model forecasted a price of $70.58. Our assumptions include a WACC of 11.4% and a 3% terminal value growth rate.8 6 See Appendix I: Income Statement Forecast 7 See Appendix II: Discounted Cash Flow Forecast 8 See Appendix II: Discounted Cash Flow Forecast


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Figure 17: Long-Term Price Target

Price Target P/E Multiple Value $59.76 33% $19.92 EBITDA Multiple Value $68.31 33% $22.77 DCF Value $70.58 33% $23.52 Price Target $66.21

To arrive at our 12-month price target we applied a conservative current price multiple of 6 to our $4.98 earnings per share forecast to arrive at $29.88.

Risks Uncertainty surrounding search for new CEO: On April 10, 2012 Best Buy announced the resignation of CEO and director Brian Dunn after 28 years at the company. The board is currently investigating whether the former CEO misused company funds while carrying out a relationship with a female subordinate. Best Buy has formed a selection committee to find a new CEO within an estimated 6 to 9 month time period. We feel that any prolonged search will weigh heavily on the stock in the near term. Corporate Governance in question: Former CEO and founder Richard Schulze is the chairman of the board and owns 18% of shares outstanding. Schulze and his relatives have benefited personally from personal connections to Best Buy. Best Buy currently has leased two stores from Schulze since 1990 and most recently paid him $1 million under those leases. The company also paid $854,000 for the use of airplanes from a chartered aircraft service he controls. Best Buy also purchased $9.7 million in store equipment and furniture from Phoenix Fixtures Inc., a company owned by Mr. Schulze’s brother. In addition, Best Buy also paid $298,599 to Mr. Schulze’s daughter, for her work as chair of the Best Buy Children’s Foundation. Best Buy has stated publicly that the board has examined all the payments and deemed them reasonable. Any news regarding additional conflicts of interest may weigh heavily on the stock. Continued weakness in same store sales: Comparable store sales declined 1.7% in fiscal 2012 and have been a drag on the stock price. If Best Buy is unable to reverse sales declines this will negatively affect the stock. RadioShack partnership with Target competes directly with Best Buy Mobile: During 2011, Radioshack successfully completed the rollout of a Target Mobile center to 1,496 Target stores throughout the US. Currently the business is operating at a $17 million operating loss. Going forward this may compete directly with Best Buy Mobile and reduce sales growth.


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Appendix

Appendix I: Income Statement Forecast

INCOME STATEMENTS

Historical Projected2012 2013 2014 2015 2016 2017

Revenue 50,705 50,705 50,705 53,271 55,966 58,798Less: Total COGS (38,113) (38,013) (37,912) (39,625) (41,584) (43,643) Gross Profit 12,592 12,692 12,793 13,646 14,382 15,155

Less: Total SG&A (10,242) (10,189) (10,037) (10,436) (10,961) (11,514) EBIT 2,350 2,503 2,756 3,210 3,420 3,641

Interest & Other Expense / (Income): Rate Revolver 2.40% 12 0 0 0 0 Term Loan 0.00% 0 0 0 0 0 Sr. Sub. Notes 5.44% 92 27 0 0 0 Total Interest Expense 103 27 0 0 0

Less: Interest Income 1.0% (12) (6) (11) (23) (37)Financing Costs Amortization 7.0 y 58 58 58 58 58 Pretax Income 2,354 2,678 3,163 3,386 3,621 Less: Income Taxes 35.00% (824) (937) (1,107) (1,185) (1,267) Net Income 1,530 1,740 2,056 2,201 2,354 Shares Outstanding 307 262 217 172 127 Earnings per Share (EPS) $4.98 $6.64 $9.48 $12.80 $18.53


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Appendix II: Discounted Cash Flow Forecast

VALUATION ANALYSISProjected

2012 2013 2014 2015 2016 20170 1 2 3 4 5

Free Cash Flow Calculation EBIT $2,503 $2,756 $3,210 $3,420 $3,641 Plus: Depreciation $897 $897 $897 $897 $897 Plus: Amortization $48 $48 $48 $48 $48 EBITDA 3,448 3,701 4,155 4,365 4,586 Less: Capex (766) (766) (766) (766) (766) EBITDA Less Capex 2,682 2,935 3,389 3,599 3,820 Less: Taxes on EBIT 35.0% (876) (965) (1,124) (1,197) (1,274) Less: Changes in Working Capital (3) (3) (68) (67) (70) Unlevered Free Cash Flow 1,803 1,968 2,198 2,335 2,476

DCF Enterprise Value Calculation

Terminal Value Calculation Terminal Value Growth Rate 3.0% Projected Free Cash Flow 2,550 Discount Rate (WACC) 11.4% Terminal Enterprise Value 30,537 Implied Term. Value EBITDA Multiple 6.7x

Discounted Cash Flows at WACC Unlevered Free Cash Flow 1,619 1,587 1,592 1,519 1,446 Terminal Value 17,839 Total Discounted Cash Flows 25,603 1,619 1,587 1,592 1,519 19,286

Summary DCF Valuation DCF Equity Sensitivity Analysis DCF Enterprise Value $25,603 7.8x WACC Less: Net Debt ($1,465) Growth 10.0% 11.4% 15.0%

1.0% 69.69$ 59.68 42.34 Equity Value $24,138 2.0% 76.56 64.55 44.62 Shares 342 3.0% 85.39 70.58 47.27 DCF Value per Share $70.58 14.2x Forward


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Appendix III: Porter’s Five Forces Analysis

Porter's 5 Forces

Bargaining Power of Customers (High)

Bargaining Power of Suppliers (Low)

Rivalry Among Existing Players

(High) Threat of New Entrants (Low)

Threat of Substitutes (High)

Customers are able to compare prices directly online and choose the least costly

Due to high industry concentration of top player Best Buy, they must offer significant discounts for the larger retailers

Strong competition from large scale retailers (Walmart, Target)

High Capital Requirement

Online Retailing offers lower prices and convenience of home delivery Distribution

Network Low profit margins

Consolidating Industry


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Appendix IV: SWOT Analysis

SWOT Analysis Strengths Weaknesses

• Largest Electronics Retailer with 1100 Big Box Stores in US, 305 Best Buy Mobile and 2861 International Stores

• High fixed costs due to Big Box physical locations dragging down profit margins

• Customer centric business model • Higher penetration of lower margin

products will impact profitability

• Strong supporting infrastructure

• Increased promotions and reduced product prices adversely impact gross margin

• Store Presence and Warranties Opportunities Threats

• High Growth business in Best Buy Mobile

• Cautious consumer and slow recovery in the US

• Leverage brand awareness to grow online presence and compete with online retailers

• Uncertainty in Europe dragging down profits and expansion

• Reduce store footprint to increase profit margins

• Intense competition from large retailers and online retailers squeezing margins

• Increased cost of procurement from

China as labor costs surge


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Appendix V: Field Research

Stephen Baker, Vice President Industry Analysis – NPD Group

1. Problems in consumer technology are structural, hitting all suppliers and retailers equally. Retailers being connected to the consumer feel changes first.

2. 2011 Best Buy Facts: • Share of consumer technology revenue stood at 19% of hardware sales, unchanged

from 2010. • #1 brick-and-mortar retailer online, gaining almost 1 point in revenue share to 22.4%

among retailers on the Web. • #1 non-manufacturer seller of windows notebooks on the web, gaining 2 points in

market share. • Largest retailer of Apple notebooks, selling 1 in 4 notebooks in the US. • Despite overall decline in television market, brick-and-mortar stores gained 1 point in

market share. • Accounts for nearly 1 in 3 dollars spent on flat-panel TVs. • Televisions 50” and above, market share stands at 31% - 3 times higher than any other

retailer. • Gained 1.5 points in market share in TV sales on the web. • Sold more tablets than any other retailer on the web. • Unit sales of cell phone grew by 25%. • Share of smartphone sales increased by 50%. • Sold 1 in 4 smartphones sold through multi-carrier stores. • Single largest non-carrier outlet for smartphone sales. • Largest seller of DSLRs cameras in the US – 2x market share of nearest competitor.

Adam Hauser, Director of Investor Relations – Best Buy

1. Able to drive connections better for mobile carriers than carriers themselves by discounting phones and providing various options.

2. Majority of revenues at Best Buy Mobile are from % of lifetime value attributed to the carrier. 3. Able to discount phones heavily to drive store traffic and make profits on connections. 4. Increasing connections in mobile, tv, and e-tablets.

James K. Willcox – Consumer Reports

1. Sony and Samsung are moving away from Minimum Advertised Pricing to Unilateral Pricing Policy effective April 1, 2012.

2. This will penalize retailers from selling a TV below manufacturer’s preset price. Manufacturers will now cut-off retailers product supplies if the retailer advertises or sells the TV below minimum predetermined price.

3. Indicated that this practice will benefit brick-and-mortar stores.


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4. Theses pricing policies will be imposed on higher-end products that benefit from showroom presentation as in Best Buy. These products typically have higher margins for manufacturers and retailers.


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Appendix VI: NPD Consumer Survey

The NPD Group: Consumers Still Reluctant to Purchase Traditional Consumer Electronics Online

According to NPD's new "E-commerce and Consumer Electronics: Online Shopping & Purchasing" report, 63 percent of consumers consult the web first when researching electronics but only half of all consumers end up making the purchase online

PORT WASHINGTON, N.Y., September 15, 2011 --

According to a new report from The NPD Group, a leading

market research company, even as the incidence of Web-

shopping increases, many U.S. consumers remain

reluctant to purchase certain consumer electronics (CE)

products online, even after using the Web to find out

more about them. NPD's "E-commerce and Consumer

Electronics: Online Shopping & Purchasing" report reveals

that televisions are the fourth most-likely item that

consumers research online prior to purchasing (56

percent); however, it's the least likely electronics product

that consumers would actually purchase online (19

percent). Smartphones also showed a much higher level

of research versus buying online: while 52 percent of

consumers would seek out information about smartphones

on the Web, just 23 percent could imagine themselves

going online to purchase one. In contrast more people (66

percent) do both their research (66 percent) and expect to

make an actual purchase (34 percent) online for PCs then

for any other CE device.

"It's not surprising to see that so many consumers won't

buy TVs, smartphones, and other popular CE products

online, despite using the Internet to perform basic product

research," said Stephen Baker, vice president of industry

analysis for NPD. "Computers and other IT products have

a much longer history online with a wider variety of

outlets, including direct sales from manufacturers, for

consumers to choose from."

https://npd.com/corpServlet?nextpage=corp_welcome.html

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Top consumer electronics products consumers were

"extremely" or "very likely" to purchase online, included

the following:

• Computer software | 34%

• Computer | 34%

• eReader | 32%

• Digital Camera | 30%

• Computer accessories/peripherals

| 30%

• Tablet computer | 29%

• Printer | 24%

• Smartphone/mobile phone | 23%

• Camcorder | 21%

• Blu-ray player | 21%

• Home audio | 20%

• Television | 19%

"Part of consumers' unwillingness to purchase certain

electronics online might be due to a lack of awareness, or

as a result of the slow pace taken by many traditional CE

companies establishing a direct-to-consumer buying

presence on the Web, or it could be something inherent in

the products themselves, such as price or complexity,"

Baker said. "Whatever the cause, the result is a badly

skewed online sales mix that relies heavily on a narrow

range of products, and one that doesn't adequately

address some of the more exciting growth opportunities."

According to Baker, "retailers continue to have an edge

with consumers, when they can leverage their physical

storefronts with a strong online presence." In fact more

than three quarters (76 percent) of all consumers say they

have used a retailer's website to research a potential

purchase, compared to just 62 percent for manufacturer-

direct shoppers and 65 percent for online-only shoppers.

Reinforcing consumers comfort with a multi-channel

approach to gathering information, NPD's data shows that

using retailers' stores and websites are among the top five


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activities consumers do first, when they begin to consider

purchasing consumer electronics.

Information in NPD's "E-commerce and Consumer

Electronics: Online Shopping & Purchasing" report is based

on online surveys fielded in June 2011 to a representative

sample of 1,326 panelists from NPD's online panel. Results

were balanced to represent the U.S. adult population

Disclosures: Ownership and material conflicts of interest: The author or a member of their household, of this report does not hold a financial interest in the securities of this company. The author or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as an officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Ratings key: Banks rate companies as a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies returns between and 0% and 15% over the next twelve months. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security.

Documents

Best Buy Research Report Final