Best Buy Co., Inc. UNIVERSITY OF OREGON INVESTMENT GROUP RECOMMENDATION: BUY

Transcription

1 UNIVERSITY OF OREGON INVESTMENT GROUP January 8 th, 2011 Consumer Goods Best Buy Co., Inc. RECOMMENDATION: BUY Stock Data Price (52 weeks) $ $40.83 Symbol/Exchange BBY / NYSE Beta 1.19 Shares Outstanding 408 M Average daily volume 7.1 M (3 month average) Current market cap 14,057 M Current Price Dividend Dividend Yield $ % Valuation (per share) DCF Analysis $44.48 Comparables Analysis Target Price Current Price Summary Financials $38.26 $41.37 $34.47 Revenue Net Income Operating Cash Flow 2010 A $49,694 M $1,317 M $2,206 M BUSINESS OVERVIEW Best Buy Co., Inc. is a multinational retailer of consumer electronics, home office products, entertainment software, appliance and related services. The company was founded Sound of Music in 1966, and legally changed its name to Best Buy Co. in Best Buy offers retail service through a variety of brand names, including Best Buy, The Carphone Warehouse, Five Star, Future Shop, Geek Squad, Magnolia Audio Video, Napster, Pacific Sales, and The Phone House. The company offers services in numerous countries around the world, and thus classifies its Covering Analyst: Ari Siegel asiegel@uoregon.edu The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational. Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be. addition, members of UOIG may att

2 revenues into two different operational categories: Domestic & International Revenue. The Domestic segment includes all sales within the United States, while the International Segment includes sales from Europe, China, Canada, Mexico and Turkey. At the end of fiscal year 2010, the Domestic segment produced 75% of total company revenue through sales at over 1,100 stores. The vast majority of these locations are Best Buy superstores, selling all the various products and services that the company has available for retail. At a higher level of detail, Best Buy stores have offerings in six revenue categories: consumer electronics, home office, entertainment software, appliances, services and other. Consumer electronics consists of video and audio products, including televisions and MP3 players. Home office revenue includes products such as personal computers, smart phones and commissions related to the sale of cell phone, cable and internet service plans. Entertainment ment includes any sales consisting of service contract sales and extended warranties, such as computer insurance through Geek Squad. Finally, the Other segment consists of noncore sales such as food and beverages. The revenue mix across these categories in the Domestic Segment is currently as follows:. Domestic Sales Mix Consumer Electronics 39% Home Office 31% Entertainment Software 19% Appliances 5% Services 6% Other <1% The International Segment comprises the other 25% of total revenue produced by Best Buy. While this segment produces less revenue, the total number of stores within this segment is much greater, at 2,835. This size difference is largely due to smaller store outlets with more specific product focuses. The vast majority of stores within this segment are a part of Best Buy Europe, a company that was acquired in fiscal year International revenue is classified into the same six segments as the Domestic segment. Due to sales mix differences, gross margin in the International Segment is slightly higher than the Domestic. The specific sales mix is as follows:. International Sales Mix Consumer Electronics 26% Home Office 45% Entertainment Software 9% Appliances 10% Services 10% Other <1% As a whole, Best Buy sells non-sitive to the economic conditions and environments it operates in. The business is seasonal, with most of sales and earnings produced around the Holidays in fiscal quarter four. Due to the maturity of the domestic market, comparable store sales increases are driven in the long run by new technology and the replacement cycle for older technology. While no 35% of the company is purchased from Apple, Hewlett-Packard, Samsung, Sony and Toshiba. 2

3 BUSINESS AND GROWTH STRATEGIES Best Buy describes its core philosophy as enriching the lives of its customers in the connected world. In business terms, this has translated into four key strategies: increasing market share, international growth, connecting the world, and increasing efficiency. The company has pursued these initiatives to varying degrees of success. With the bankruptcy of Circuit City in 2009, Best Buy was able to organically capture the market share left open in the consumer electronics industry. In contrast to this this unique incident, organic growth opportunities are rare, and so top line growth is generally pursued through mergers and acquisitions. The majority of international stores owned by Best Buy are not in fact operated under the Best Buy brand name. In China, Best Buy operates the consumer electronics chain Five Star, while in Canada the company operates stores under the brand name Future Shop. Future international growth will likely be through the purchase of pre-existing consumer electronics retail chains as oppose to the direct opening of Best Buy stores. These pre-existing chains would then be business model. The second use of Best Buy acquisitions are the incorporation of services into pre-existing Best Buy stores. A recent example of this is the acquisition of Geek Squad. This company specialized in technology service and repair, and now Geek Squad centers are now present in the vast majority of Best Buy stores today. growth strategy. While in the past Best Buy has focused on solely consumer electronics, it is in the process of shifting towards providing end to end solutions for its customers. The company is no longer interested in selling just a notebook, but the software, internet connection and insurance that go with it. The most important piece of this strategy today is Best Buy Mobile. Best Buy Mobiles are either formatted as their own individual stores, or as kiosks within larger Best Buy locations. At these locations, customers can look at cell phones and data plan options from across numerous cell phone providers and choose which technology and plan fits them the best. In addition to profiting from the sale of cell phones, the company is also paid a sales commission by the various cell phone companies when a customer purchases a new cell phone plan specifically through a Best Buy Mobile. The addition of these services continues to grow sales and increase overall gross margin, due to the low costs of selling data services. MANAGEMENT AND EMPLOYEE RELATIONS Brian Dunn is the current Chief Executive officer of Best Buy. He began with the company in 1985 as a sales associate, and worked his way through increasingly important management and executive positions. Large portions of executive compensation at Best Buy are through options awards, and insider ownership is currently at 17%. At the lower level, Best Buy employees are not paid on commission, allowing them to let the customer drive the purchasing process. RECENT NEWS Best Buy Announced Regular Quarterly Cash Dividend (12/15/2010) - Bloomberg o Best Buy announced its regular quarterly cash dividend of 15 cents per common share. Best Buy has seen consistent dividend growth since Best Buy shares slide after results disappoint (12/14/2010) Marketwatch o Best Buy shares fell more than 15% in one day after reporting disappointing third quarter results. While margins widened, sales expectations were missed due to lower demand for televisions, note books and videogames. Management estimated market share declined 1.1 percentage points. Potential reasons for the demand shortfall include too much focus on margin growth, and Bes decision this year to not focus as much on opening price points for larger televisions. This price point miscalculation was reflected by a 10% comparable store sales drop in the consumer electronics 3

4 segment. Overall, the price dropped so significantly not solely because of a lacking third quarter, but because a disappointing third quarter indicates a disappointing and more important fourth quarter. The Best Deal in Best Buy Just Might Be Its Stock (10/3/2010) Wall Street Journal o In contrasts to a disappointing third fiscal quarter, this article discusses the excellent second quarter results Best Buy reported at the end of August. Investors expected on average earnings of 42 cents per share, and the company reported 60 cents per share. INDUSTRY The consumer electronics industry retails a range of appliances and electronical equipment. Inventory is purchased from original equipment manufacturers before being passed on to basic consumers. Excluding internet retailers, industry revenue is currently estimated to be over $80 billion dollars a year. Competition is fierce, with a moderate amount of consolidation in the industry. Best Buy has a market share of just over 40%, followed by RadioShack Corporation with a market share of 5%. After these two larger firms, no other retail chains control a significant amount of the market. On the internet, companies such as Amazon and EBay are also competing for consumer electronic sales. Various types of products sold are as follows: As a result of additional competition from online retailers and a recovering US economy, overall revenue growth for non-online consumer electronics retailers is expected to be a modest 2.5% for the next several years. Domestically, the industry is mature, and so above average growth must come from capturing market share. As a whole, growth is driven by two main factors: the electronic replacement cycle and technological progress. The be replaced every few years. Technological progress leads to sales of new electronics such as smartphones or 3-D televisions, which increase overall industry size. The industry itself is sensitive to economic conditions, and sales decline in periods of economic uncertainty. Key drivers of overall success include GDP growth, per capita disposable income and consumer sentiment. IbisWorld projections of these key indicators are as follow, but should be taken with a grain of salt considering the uncertainty surrounding any long term economic projections: 4

5 In certain segments of the industry, prices are falling quickly as technology becomes more widespread. The average price of a TV has fallen around 50% since 2006 as the product has become more mature. When technology is first introduced to the industry, its price is generally at the highest point. An example of this trend is high priced 3D televisions, as compared to now very low margin video game hardware sales. As a whole, margins are slim within the industry, with an average net profit margin of around 3%. The majority of costs are purchases of inventory, followed by the wages of employees. S.W.O.T. ANALYSIS Strengths Valuable and well-known brand Strong fundamentals Weaknesses Increased sales growth tends to decrease margins, and vice versa Highly competitive industry Opportunities International Markets New technology (3D televisions, smartphones, etc.) Connected World strategy Threats Increasing competition from online retailers Loss of market share 5

6 PORTERS 5 FORCES ANALYSIS Supplier Power Moderate and steady. While Best Buy does depend on a few key suppliers for its products, as a whole they have a restricted ability to change prices due to the commoditization of many items Best Buy sells. Barriers to Entry Moderate and steady. A relatively small amount of capital is required to set up an electronics store. Consumers do expect a minimum selection of products and size of retail location. Buyer Power Low and steady. Consumers at an individual level have very little say in what is charged for specific products. Threat of Substitutes Low and steady. There are no real substitutes for electronic goods. Degree of Rivalry High and increasing. While there has always been competition between various electronic retail stores, the addition of online retailers is leading to a higher degree of rivalry. COMPARABLES ANALYSIS EV/EBITDA, EV/Operating Cash Flow and EV/Revenue were all used to find an implied value for Best Cash Flow and Revenue lagging twelve months, respectively. This comparables analysis uses a more quantitative method than has historically been the practice within the investment group. As oppose to the subjective weightings of comparable companies, weightings were determined by equating the fundamentals of comparable companies to the fundamentals of Best Buy. While not a perfect measure of value, this method should provide a more accurate valuation of a given company. The weightings process is explained after a description of the comparable companies used in the analysis. Staples, Inc. (SPLS) 11% Staples, Inc. operates as an office products company. The company sells various office supplies and services, business machines and related products, computers and related products and office furniture. It also provides high-speed, color and selfservice copying, other printing services, faxing and pack and ship services (Stables 10-k). Staples business model is similar to that of Best Buy. Both firms operate large numbers of consumer electronics retail stores both internationally and domestically while facing increasing online competition. The main difference between the two companies is slight product differentiation due to Staples focu on the connected world. 6

7 Using a one year regression, Staples has a beta slightly lower than that of Best Buy, at.95. The company has consensus forecasted growth for the next few years at a slightly higher rate than Best Buy as well. Its enterprise value of debt. Staples has a higher gross and net margin. Dell, Inc. (DELL) 17% Dell Inc. designs, develops, manufactures, markets, sells and supports computer systems, as well as provides related services worldwide. It offers desktop PCs;; notebook computers, mobile workstations, and smartphones servers and networking products;; storage solutions, including storage area networks, network-attached storage, direct attached storage, disk and tape backup systems, and removable disk backup;; and printers and displays. The company also provides third-party software products, such as operating systems, business and office applications, anti-virus and related security software, and entertainment software;; and peripheral products, such as printers, televisions, notebook accessories, mice, keyboard, networking and wireless products, digital cameras, power adapters and scanners. The company sells its products through its sales representatives, telephone-based sales, and online at dell.com, as well as through indirect sales channels (Dell 10-k). Dell is an original equipment manufacturer, meaning it produces the electronic equipment it sells and often sells its products indirectly through various retailers. While the company has a different business model than Best Buy, the success of Dell strongly correlates with the success of consumer electronics retailers as when a company like Best Buy is selling a large number of computers, it will purchase more inventory from Dell. Due to this relationship, both firms share a number of business risks. An important difference to note is that due to Dells position as an original equipment manufacturer, it does not face the online competition that other comparable companies in this analysis do. Using a one year regression, Dell has a beta of 1.4 somewhat higher than the systemic risk of Best Buy. The companys consensus forecasted profitability growth over the next few years is higher than Best Buys, and is also the highest of the comparable companies used in this valuation. Dell is a slightly larger company than Best Buy, with an enterprise value of approximately $20 billion. This is due to a larger market capitalization, and a proportionally larger amount of debt offset partially by a large cash holding. Dell has a slightly higher margin than Best Buy. GameStop Corp. (GME) 33% GameStop Corp. operates as a retailer of video game products and personal computer entertainment software. It sells new and used video game hardware;; video game software;; video game accessories, including controllers, memory cards, and other add-ons;; PC entertainment software;; and strategy guides and trading cards. The company sells its products through its stores, as well as through electronic commerce web sites (GameStop 10-k). While GameStop operates within the consumer electronics industry, it operates within a specific segment namely the sale of electronics related to playing games. Both GameStop and Best Buy operate a large number of stores internationally, and face similar -term competition from online retailers than Best Buy, as almost all of its sales are related to software that can be downloaded over the internet, while the majority of Best Buy sales cannot be transferred to a customer with just an internet connection (televisions, appliances, etc.). 7

8 Using a five year regression, GameStop has a beta of A one year regression produced unreasonably low results. GameStop is forecasted to have lower profitability growth than Best Buy over the next few years, consistent with the long term expectation of its competition from online retailers. The company is significantly smaller than Best Buy, with an Enterprise Value of $3.5 billion and very little debt. GameStop has a slightly higher margin than Best Buy due to its higher margin software sales. RadioShack Corp. (RSH) 39% RadioShack Corporation engages in the retail sale of consumer electronic goods and services through its RadioShack store chain and non- RadioShack branded kiosk operations. Its products include postpaid and prepaid wireless handsets and communication devices, such as scanners and global positioning system products;; home entertainment, wireless, music, computer, video game, and GPS accessories;; media storage, power adapters, digital imaging products, and headphones;; home audio and video end-products, personal computing products, residential telephones, and voice over internet protocol products;; digital cameras, digital music players, toys, satellite radios, video gaming hardware, camcorders, and general radios;; general and special purpose batteries and battery chargers;; and wire and cable, connectivity products, components and tools, and hobby products. The company also provides access to third-party services, such as wireless telephone activation, prepaid wireless airtime, and extended service plans (RadioShack 10-k). In terms of a business model, RadioShack is by far the most comparable publically products and services as Best Buy through the exact same retail format. Using a 1 year regression, RadioShack has a beta of Over the next few years, the company is expected to grow profitability at a slightly lower rate than Best Buy. RadioShack is a much smaller company than Best Buy, with an Enterprise Value of approximately $2 billion, and a proportionally larger amount of debt. RadioShack has a slightly higher margin than Best Buy. Weightings Fundamentally, the multiple a company should be trading at should is determined by the same variables that are important in a Discounted Cash Flow valuation. At the bottom line, these variables are free cash flow, the expected growth of free cash flow, and the discount rate. Therefore, in order to perform an accurate relative valuation, the final weighted average fundamentals of comparable companies used should be the equivalent of the fundamentals of the company being valued. In other words, if one is going to value Best Buy, one should price it by looking at companies that are going to produce the same amount of cash flow at the same levels of risk as Best Buy. Using expected EBITDA growth over the next 3 years and beta as a proxy for growth and risk, weights were chosen that reflect the same expected growth and risk as Best Buy. The use of companies from within the same industry as Best Buy helps to control for longer term growth and risk trends not reflected in short term numerical forecasts. The analysis is as follows: 8

9 The University of Oregon Investment Group SPLS DELL RSH GME Weighted Average BBY Weight 11% 17% 33% 39% Beta EBITDA (3 Years compounded) 17.42% 34.93% 9.08% 4.55% 12.63% 11.25% Using the weights above gives an accurate representation of what Best Buy should trade at within the comparables model. While this method does not resolve all issues within a relative valuation, it should provide an accurate and less subjective representation of the value of Best Buy. DISCOUNTED CASH FLOW ANALYSIS A bottom up approach was used for the discounted cash flow valuation. The majority of line items were projected as a percentage of sales in order to find free cash flow to the firm. Revenue Revenues were projected by first breaking sales into their two operating segments, Domestic and International. From that point, a revenue-per-store model was used to project the sales of each segment. In the Domestic segment, revenue-per-store is forecasted to increase at modest rates due to market maturity, after recovering from a short term loss of market share. In the international segment, Best Buy still has a significant amount of room to increase sales. In addition, the company is in the process of transforming smaller Best Buy Europe stores into larger centers like the ones seen in the United States. As a result of these two factors, revenue growth per store is forecasted at higher rates for the next few years, before decreasing moderately to levels slightly above the Domestic segment. Cost of Revenue Cost of Revenue world strategy continues to decrease variable costs. These cost decreases should come at a somewhat slower rate than in the past, as this past quarter was a wake-up call to management, and should lead to more focus on sales instead of margin growth. Cost of revenue is forecasted to begin to increase once the connected world strategy has been completely employed due to increased competition from online retailers. A higher gross margin in the international segment should somewhat offset margin pressure from online retailers as the international segment becomes a larger part of overall revenue. Depreciation and Amortization Depreciation has been increasing over the last few years as a result of recent acquisitions and increased store remodeling. Due to these factors, D&A is forecasted to remain at these higher levels for the next few years before trailing back to historical levels. Operating Expenses SG&A has been deleveraging over the last two years as a result of comparable store sales decreases and a weak economy. In addition, the acquisition of Best Buy Europe increased overall SG&A as a percentage of revenue due to high operating costs. As management returns its focus to top line growth, and the effects of the recession wear off, SG&A is forecasted to decrease into the terminal year towards pre-recession levels. Tax Rate Best Buy has had a historically volatile tax rate. Going forward, the tax rate was projected at a constant 36%, an approximate weighted average marginal tax rate of the countries it operates in. The final valuation was not sensitive to this assumption within the range of plausible tax rates. 9

10 Net Working Capital Best Buy has historically maintained a current ratio between 1.1 and 1.2. Lacking any significant business model changes, net working capital was forecasted within the middle of this range in the short term, before trending down towards the bottom of the range as increasing services sales decrease inventory as a percentage of sales. Capital Expenditures Capital Expenditures are forecasted to increase slightly over the next few years as Best Buy Europe stores are remodeled into larger retail locations. This focus on remodeling will mean less focus on acquisitions, and acquisitions were projected at smaller percentages of revenue over the next two year before being projected as a constant rate similar to historical levels into perpetuity. Approximately one third of capital expenditures are related to new store openings, one half related to information technology and the last portion to store projects. Beta A Hamada calculation was used to estimate Best Buys beta. A regression would have been inappropriate for use considering Best Buys recent acquisitions and stock price volatility. The Hamada calculations can be found in appendix 6. Cost of Debt Best Buy issued debt in June 2008 at a fixed rate of 6.75%, due in July of This is the only significant recent issuance of long term debt, and so was used as the cost of debt. This cost is consistent with Best Buys current credit rating of BBB+ (Fitch Ratings Ltd.). RECOMMENDATION Short term volatile price movements at Best Buy have provided a potentially valuable investment opportunity. While this year the company has faced market share loss, in the long term continued technological progress and the consumer electronics replacement cycle should lead to overall moderate cash flow growth into perpetuity. In the face of increasing competition for sales from an on Target Price connected solutions and products customers prefer to purchase in store should allow for continued success. Both comparables and discounted cash flow valuations suggest an undervaluation, and thus I am recommending a BUY for the Tall Firs and Svigals Portfolios, with a target price of $ Comparables (50%) $ DCF (50%) $ Final Price $ Undervaluation 20.02% 10

11 APPENDIX 1 COMPARABLES ANALYSIS The University of Oregon Investment Group 11.00% 17.00% 33.00% 39.00% Weighted Average ($ in millions, except per share data) BBY SPLS DELL GME RSH Stock Characteristics Current Price $ $ $ $ $ Day Moving Avg. $ $ $ $ $ Day Moving Avg. $ $ $ $ $ Beta Size ST Debt $ 723 $ 590 $ 826 $ - $ 350 LT Debt $ 1,101 $ 2,055 $ 5,168 $ 249 $ 328 Cash and Cash Equiv. $ 927 $ 1,370 $ 13,412 $ 181 $ 720 Minority Interest $ - $ 7 $ - $ (1) $ - Preferred Stock Diluted Share Count Market Cap $ 14,057 $ 16,854 $ 26,682 $ 3,512 $ 2,285 $ 8,440 Enterprise Value $ 14,954 $ 18,136 $ 19,264 $ 3,579 $ 2,242 $ 7,325 Profitability Margins Gross Margin 25% 26.40% 17.70% 25% 28.60% 25.32% EBIT Margin 4.60% 6.20% 6.50% 7.10% 8.70% 7.52% EBITDA Margin 6.70% 8.50% 7.50% 8.90% 10.80% 9.36% Net Margin 2.20% 3.00% 4.80% 4.20% 4.80% 4.40% Credit Metrics Interest Expense (MRQ) Debt/Equity (MRQ) Debt/EBITDA (LTM) EBITDA/Interest Expense (LTM) Operating Results Revenue (LTM) $ 50, $ 24, $ 60, $ 9, $ 4, EBITDA (LTM) $ 3, $ 2, $ 4, $ $ Operating Cash Flow (LTM) $ 1, $ 1, $ 3, $ $ Valuation EV/Revenue 0.30 x 0.74 x 0.32 x 0.38 x 0.51 x 0.46 x EV/EBITDA 3.93 x 8.43 x 4.80 x 4.36 x 2.80 x 4.28 x EV/Operating Cash Flow 7.74 x x 5.13 x 5.65 x 8.04 x 7.20 x Metric Implied Price Weight EV/Revenue % EV/EBITDA % EV/Operating Cash Flow % Price Target Current Price Under (Over) Valued 11.00% 11

12 APPENDIX 2 DISCOUNTED CASH FLOWS ANALYSIS The University of Oregon Investment Group ($ in millions, except per share data) Q12 A 2011 Q34 E 2011 A+E 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E Total Company Revenue $ 35,934 $ 40,023 $ 45,015 $ 49,694 $ 22,126 $ 28,066 $ 50,192 $ 52,700 $ 55,008 $ 58,278 $ 61,431 $ 64,635 $ 67,594 $ 69,578 $ 72,656 $ 75,517 % Y/Y Growth 11.38% 12.47% 10.39% 1.00% 5.00% 4.38% 5.94% 5.41% 5.22% 4.58% 2.94% 4.42% 3.94% Cost of Revenue $ 27,165 $ 30,477 $ 34,017 $ 36,608 $ 15,934 $ 20,707 $ 36,641 $ 38,208 $ 39,606 $ 41,669 $ 44,230 $ 46,699 $ 49,005 $ 50,618 $ 53,039 $ 55,127 % Revenue 75.60% 76.15% 75.57% 73.67% 72.01% 73.78% 73.00% 72.50% 72.00% 71.50% 72.00% 72.25% 72.50% 72.75% 73.00% 73.00% D&A $ 509 $ 580 $ 793 $ 926 $ 481 $ 673 $ 1,154 $ 1,186 $ 1,238 $ 1,311 $ 1,351 $ 1,390 $ 1,419 $ 1,426 $ 1,453 $ 1,510 % Revenue 1.42% 1.45% 1.76% 1.86% 2.17% 2.40% 2.30% 2.25% 2.25% 2.25% 2.20% 2.15% 2.10% 2.05% 2.00% 2.00% Gross Profit $ 8,260 $ 8,966 $ 10,205 $ 12,160 $ 5,711 $ 6,687 $ 12,398 $ 13,307 $ 14,164 $ 15,298 $ 15,849 $ 16,547 $ 17,169 $ 17,534 $ 18,164 $ 18,879 Gross Margin 22.99% 22.40% 22.67% 24.47% 25.81% 23.82% 24.70% 25.25% 25.75% 26.25% 25.80% 25.60% 25.40% 25.20% 25.00% 25.00% Operating Expenses SG&A $ 6,229 $ 6,805 $ 8,191 $ 9,872 $ 4,987 $ 6,326 $ 11,313 $ 11,462 $ 11,827 $ 12,384 $ 12,901 $ 13,412 $ 13,857 $ 14,263 $ 14,894 $ 15,481 % Revenue 17.33% 17.00% 18.20% 19.87% 22.54% 22.54% 22.54% 21.75% 21.50% 21.25% 21.00% 20.75% 20.50% 20.50% 20.50% 20.50% EBIT $ 360 $ 1,084 $ 1,845 $ 2,338 $ 2,914 $ 2,949 $ 3,135 $ 3,312 $ 3,270 $ 3,270 $ 3,398 % Revenue 5.65% 5.40% 4.47% 4.60% 3.27% 1.28% 2.16% 3.50% 4.25% 5.00% 4.80% 4.85% 4.90% 4.70% 4.50% 4.50% Other (Expense) Income $ 162 $ 129 $ 35 $ 54 $ 35 $ 85 $ 120 $ 126 $ 132 $ 140 $ 147 $ 155 $ 162 $ 167 $ 174 $ 181 % Revenue 0.45% 0.32% 0.08% 0.11% 0.16% 0.30% 0.24% 0.24% 0.24% 0.24% 0.24% 0.24% 0.24% 0.24% 0.24% 0.24% Interest Expense % Revenue 0.09% 0.15% 0.21% 0.19% 0.20% 0.11% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% Unusual Expense $ $ $ $ $ $ $ $ $ $ $ % Revenue 0.09% 0.00% 0.57% 0.11% 0.04% 0.06% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% Pre-tax Income $ 398 $ 1,104 $ 1,866 $ 2,360 $ 2,937 $ 2,973 $ 3,161 $ 3,339 $ 3,298 $ 3,299 $ 3,428 % Revenue 5.93% 5.57% 3.78% 4.42% 3.19% 1.42% 2.20% 3.54% 4.29% 5.04% 4.84% 4.89% 4.94% 4.74% 4.54% 4.54% Less Taxes (Benefit) $ 752 $ 815 $ 674 $ 802 $ 267 $ 131 $ 398 $ 672 $ 850 $ 1,057 $ 1,070 $ 1,138 $ 1,202 $ 1,187 $ 1,187 $ 1,234 Tax Rate 35.31% 36.58% 39.65% 36.54% 37.82% 32.78% 36.00% 36.00% 36.00% 36.00% 36.00% 36.00% 36.00% 36.00% 36.00% 36.00% After-tax Ajdustments - Net $ (1) $ (6) $ (23) $ (76) $ (29) $ (28) $ (50) $ (53) $ (55) $ (58) $ (61) $ (65) $ (68) $ (70) $ (73) $ (76) Net Income $ 1,377 $ 1,407 $ 1,003 $ 1,317 $ 410 $ 240 $ 656 $ 1,141 $ 1,455 $ 1,821 $ 1,841 $ 1,958 $ 2,069 $ 2,041 $ 2,038 $ 2,119 Net Margin 3.83% 3.52% 2.23% 2.65% 1.85% 0.85% 1.31% 2.17% 2.65% 3.13% 3.00% 3.03% 3.06% 2.93% 2.81% 2.81% Add Back Depreciation and Ammortization $ 673 $ 1,154 $ 1,186 $ 1,238 $ 1,311 $ 1,351 $ 1,390 $ 1,419 $ 1,426 $ 1,453 $ 1,510 % Revenue 1.42% 1.45% 1.76% 1.86% 2.17% 2.40% 2.30% 2.25% 2.25% 2.25% 2.20% 2.15% 2.10% 2.05% 2.00% 2.00% Add Back Interest Expense*(1-Tax Rate) Operating Cash Flow $ 934 $ 1,859 $ 2,378 $ 2,746 $ 3,189 $ 3,252 $ 3,410 $ 3,554 $ 3,534 $ 3,561 $ 3,701 % Revenue 5.30% 5.06% 4.12% 4.63% 4.15% 3.33% 3.70% 4.51% 4.99% 5.47% 5.29% 5.28% 5.26% 5.08% 4.90% 4.90% Current Assets $ 9,081 $ 7,342 $ 8,192 $ 10,566 $ 9,959 $ 10,038 $ 10,038 $ 10,408 $ 10,726 $ 11,248 $ 11,856 $ 12,475 $ 13,046 $ 13,428 $ 14,023 $ 14,575 % Revenue 25.27% 18.34% 18.20% 21.26% 45.01% 20.00% 20.00% 19.75% 19.50% 19.30% 19.30% 19.30% 19.30% 19.30% 19.30% 19.30% Current Liabilities $ 6,301 $ 6,736 $ 8,381 $ 8,943 $ 8,438 $ 8,784 $ 8,784 $ 9,223 $ 9,626 $ 10,199 $ 10,750 $ 11,311 $ 11,829 $ 12,176 $ 12,715 $ 13,215 % Revenue 17.53% 16.83% 18.62% 18.00% 38.14% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% 17.50% Net Working Capital $ 2,780 $ 606 $ (189) $ 1,623 $ 1,521 $ 1,255 $ 1,255 $ 1,186 $ 1,100 $ 1,049 $ 1,106 $ 1,163 $ 1,217 $ 1,252 $ 1,308 $ 1,359 % Revenue 7.74% 1.51% -0.42% 3.27% 6.87% 4.47% 2.50% 2.25% 2.00% 1.80% 1.80% 1.80% 1.80% 1.80% 1.80% 1.80% Change in Net Working Capital $ (2,174) $ (795) $ 1,812 $ (102) $ (266) $ (368) $ (69) $ (86) $ (51) $ 57 $ 58 $ 53 $ 36 $ 55 $ 51 Capital Expenditures $ 733 $ 797 $ 1,303 $ 615 $ 342 $ 436 $ 778 $ 922 $ 1,100 $ 1,166 $ 1,229 $ 1,228 $ 1,284 $ 1,322 $ 1,380 $ 1,435 % Revenue 2.04% 1.99% 2.89% 1.24% 1.55% 1.55% 1.55% 1.75% 2.00% 2.00% 2.00% 1.90% 1.90% 1.90% 1.90% 1.90% Net Assets from Acquisitions $ - $ 421 $ 89 $ 2,316 $ 7 $ 7 $ 7 $ 105 $ 275 $ 291 $ 307 $ 323 $ 338 $ 348 $ 363 $ 378 % Revenue 0.00% 1.05% 0.20% 4.66% 0.02% 0.01% 0.20% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Unlevered Free Cash Flow $ 3,403 $ 1,345 $ (124) $ 678 $ 764 $ 1,524 $ 1,731 $ 2,074 $ 1,966 $ 2,124 $ 2,216 $ 2,177 $ 2,125 $ 2,215 Discounted Unlevered Free Cash Flows $ 725 $ 1,300 $ 1,329 $ 1,432 $ 1,221 $ 1,186 $ 1,113 $ 984 $ 864 $

13 APPENDIX 3 DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS Assumptions for Discounted Free Cash Flows Model Tax Rate 36.00% Terminal Growth Rate 3.00% Risk-Free Rate 3.35% Terminal Value $ 24,800 Terminal Risk-Free Rate 4.46% PV of Terminal Value $ 8,309 Beta 1.19 Sum of PV Free Cash Flows $ 10,964 Market Risk Premium 7.00% Firm Value $ 19,273 % Equity 92.70% LT Debt $ 1,134 % Debt 7.30% Cash $ 927 Cost of Debt 6.75% Equity Value $ 18,139 CAPM 11.71% Diluted Share Count 408 WACC 11.17% Implied Price $ Terminal WACC 12.20% Current Price $ Under (Over) Valued 29.72% APPENDIX 4 BETA SENSITIVITY ANALYSIS Beta St. Deviation Implied Price Under (Over) Valued $ % $ % $ % $ % $ % $ % $ % $ % $ % APPENDIX 5 REVENUE MODEL The University of Oregon Investment Group ($ in millions, except stores data) Q12 A 2011 Q34 E 2011 A+E 2012 E 2013 E 2014 E 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E International Segment Revenue $ 6,695 $ 9,945 $ 12,380 $ 5,767 $ 7,209 $ 12,976 $ 14,231 $ 15,213 $ 16,476 $ 17,759 $ 18,919 $ 20,084 $ 21,214 $ 22,741 $ 24,004 Stores 343 2,835 2,835 2,815 2,830 2,830 2,935 2,960 3,010 3,090 3,150 3,200 3,250 3,350 3,400 Revenue Per Store $ $ 3.51 $ 4.37 $ 2.05 $ 2.55 $ 4.59 $ 4.85 $ 5.14 $ 5.47 $ 5.75 $ 6.01 $ 6.28 $ 6.53 $ 6.79 $ 7.06 Revenue Per Store Growth % 24.48% 5.00% 5.75% 6.00% 6.50% 5.00% 4.50% 4.50% 4.00% 4.00% 4.00% Gross Margin 20.70% 23.90% 25.30% Domestic Segment Revenue $ 33,328 $ 35,070 $ 37,314 $ 16,359 $ 20,858 $ 37,217 $ 38,469 $ 39,794 $ 41,802 $ 43,672 $ 45,716 $ 47,510 $ 48,364 $ 49,915 $ 51,513 Stores 971 1,107 1,192 1,246 1,300 1,300 1,320 1,340 1,380 1,410 1,440 1,460 1,450 1,460 1,470 Revenue Per Store $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Revenue Per Store Growth -7.70% -1.19% -8.55% 1.80% 1.90% 2.00% 2.25% 2.50% 2.50% 2.50% 2.50% 2.50% Gross Margin 24.50% 24.60% 24.20% Total Revenue $ 40,023 $ 45,015 $ 49,694 $ 22,126 $ 28,066 $ 50,192 $ 52,700 $ 55,008 $ 58,278 $ 61,431 $ 64,635 $ 67,594 $ 69,578 $ 72,656 $ 75,517 13

14 APPENDIX 6 HAMADA BETA The University of Oregon Investment Group Company Beta D/E Standard Error Weight Variance RSH % % 0.05 GME % % 0.07 DELL % % 0.03 AAPL % % 0.02 SPLS % % 0.02 AMZN % % 0.04 HP % % 0.06 MSFT % % 0.02 Mean % % 0.04 Pure Business Beta 1.18 Sample D/E 11.70% Unlevered Business Beta 1.10 BBY D/E 0.13 BBY Beta 1.19 APPENDIX 7 SOURCES FactSet BBY Sec Filings IbisWorld Research 14