BBY Valuation MMS analysts: Austin Taylor, Yunning (Emma) Zhang, Jingduo Bi, Nian Liu

Executive Summary

We recommend against buying the BestBuy because of the following reasons:

1. The turnaround strategy is a paradox.

2. The financial valuations indicate that the company is overvalued.

Agenda• Business Strategy• Key Forecast Assumptions• Valuations• Sensitivity Analysis• Recommendation• Q&A

Business StrategyCurrent Strategy: Cost Leadership

Turnaround Strategy (“Renew Blue”*)

Cost Leadership- More price

competitive- Focus on core business

activities- Shut down

unprofitable stores- Employee termination

Differentiation- Better customer’s

physical experience- More customer-facing

labor- Train store associates- Upgrade stores

Competitive Advantages?Hard to balance between cost competitive and cost

increased by differentiation **.

Trend

Sources: * BBY 2015 financial report. ** http://www.businessinsider.com/best-buys-strategy-is-a-paradox-2014-4

Risk Analysis

• Strong competition from traditional store based retailers, multi-channel retailers, internet-based business.

• Failure to effectively manage cost.

• Hard to attract qualified employees in key positions especially under a cost reduction strategy.

• Change in credit ratings may limit capital access and borrowing cost.

Key Forecast AssumptionsKey Forecast Assumptions Value Source

2016 Revenue Growth Rate -0.24% Yahoo Finance, Bloomberg…

2017-2020 Revenue Growth Rate 6.04% Thomson one, Yahoo Finance

Thereafter Revenue Growth Rate 2.00% U.S GDP growth rate

COGS in next three years -400 millions Letter to shareholders

Restructuring Charge in 2016 100 millions BBC news

Short Term Investments in 2016, 2017 150 millions BBC news

Valuation Best Buy Co IncNYSE: BBY - May 1

35.18

EVA

MultipleFCFCE

FCFU

Capital Structure & WACC

rf 2.25% rd 4.925%rm-rf 7.10%Short term borrowings 0Beta 1.85 Long term debt 1484

rE(CAPM) 15.41% Total on B/S debt 1484Shares outstanding 351,468,000 Oper. lease debt 3111

Obs. Price, 5/01/2015 35.18 Combined Debt 4595Market value equity 12,364,644,240

Market value equity (in miilions) 12365

Enterprise Value 16959wE 72.91%wD 27.09%Tax rate (Notes 10) 35.80%Rwacc 12%

Equity Debt

Operating Asset View with Operating Lease

EVA Valuation Best Buy Co IncNYSE: BBY - May 1

35.18

33.38 Overvalued

FCFU Valuation Best Buy Co IncNYSE: BBY - May 1

35.18

26.58 Overvalued

FCFCE Valuation Best Buy Co IncNYSE: BBY - May 1

35.18

27.79 Overvalued

Multiple Valuation Best Buy Co IncNYSE: BBY - May 1

35.18

54.72 47.47However, we don’t think these companies are very comparable to BestBuy because Wal-Mart sells more diverse products, Apple sells products made by itself and Staples is operating in a different industry.

EV/Sales Mutiple EV/EBITDA MultipleSales Revenue 40,339.00$ 1,387.00$ Ent Val Multiple 0.51 13.08 Enterprise Value 20,757.42$ 18,140.24$ -NonControlling Int - --Current Liabilities Debt 41.00$ 41.00$ -Long Term Debt 1,484.00$ 1,484.00$ -Preferred Shares -$ -$ Equity Value 19,232.42$ 16,615.24$ Shares Outstanding 351,468,000 351,468,000 Intrinsic Share Price 54.72$ 47.27$

Best Buy - Projected Value

Key Ratios Best Buy Apple Wal-Mart StaplesProfit Margin 22.43% 38.59% 24.83% 25.79%ROA 7.36% 17.04% 8.03% 1.30%ROE 22.46% 35.42% 20.10% 2.54%P/E 10.54 15.64 15.64 78.43Asset Turnover 2.64 0.79 2.38 2.18Financial Leverage 3.05 2.08 2.50 1.94Sales to NI Effi ciency 2.78% 21.61% 3.37% 0.60%

Valuation Summary

EVA 33.38 Overvalued FCFU 26.58 Overvalued FCFCE 27.79 Overvalued

Best Buy Co IncNYSE: BBY - May 1

35.18

Sensitivity Analysis

How will growth rate change valuation results?

Not too much!

Conclusion

The table above is the range of BBY valuation. As it shows, the maximum forecast price is $34.95, which still less than the current stock price. Combined with its self-conflict business strategy, we think BBY is overvalued.

THANK YOU!