Right Price Checklist: Best Buy Management

Business, and an explanation of the checklist

Moat

Management

Integrity

Pay

Best Buy (BBY) CEO Robert Willert was paid $8.65 million last year, as opposed to $6.95 million by Circuit City (CC) CEO Philip Schoonover.

Best Buy's market cap is about 26x larger than Circuit City's, Willert's salary isn't even close to being double Schoonover's.

Restructuring

Best Buy has no one-time charges in the last three years.

Related-Party Stuff

Best Buy has multiple related party transactions:

• Two stores are leased from founder and chairman of the board Richard Shulze, the rents paid for these stores in 2007 were $976k. The company also leases airplanes from a corporation owned by Schulze, and paid him $393k for them.
• The company does business with Shulze's brother's business Phoenix Fixtures, and paid them $19 million last year.
• His daughter, Susan Hoff, received $505k for running The Best Buy Children's Foundation
• A director, Ari Bousbib, is president of Otis Elevator which received $230k for equipment in 2007.
• Director, Elliot Kaplan, is a partner in the law firm that serves as Best Buy's general counsel, they paid them $83.8 million in legal fees in 2007.
• Kaplan's daughter, Jane Kirshbaum, is their senior corporate counsel and received $200k in base salary and was rewarded 1,255 shares in options.
• Director, Matthew Paull, is a senior VP with McDonald's, with whom Best Buy has a co-marketing agreement and paid $3.1 million dollars for coupons and gift cards through the marketing agreement.
• Director, Frank Trestman, owns a third (his son also owns a third), of The Avalon Group, from whom Best Buy is leasing a property for the next ten years, at $700k for the next five years then $745k for years six through ten.

All this related-party stuff scares me about Best Buy's management, especially the fact that they claim, "It is our policy not to participate in related-party transactions... unless the transaction provides us with a demonstrable incremental benefit."

I'm not an expert, but I bet they could have found someone other than the founder's daughter to run their charity organization, and I'm pretty sure they wouldn't have to pay this person half a million.

Board of Directors

Best Buy has eleven members on their board, which is a lot considering since members include:

• The former chairman of Pepsi Bottling in Mexico
• The founder of a patient access and revenue cycle service company for health care providers
• A former CFO of McDonalds
• The executive chairman of a wireless Internet provider in California and
• A partner in the law firm that serves as their general counsel

I'm not sure they really need any of those five, and am starting to become suspicious of the company's management.

Pension Fund Stuff

There is no mention of the pension fund in the 10f or the proxy.

Revenue

Best Buy records revenue when,

The sales prise is fixed or determinable, collectibly is reasonably assured and the customer takes possession of the merchandise, or in the case of services, at the time the service is provided.

Sounds good, and I don't think Best Buy really has a business model where revenue recognition would ever come into questions.

Receivables are up 35% over the past year, and 97% since 2004, while sales are up 8% and 53% over the same periods. Again, this is a warning that Best Buy could potentially get itself into trouble.

Earnings

Best Buy missed analyst estimates by more than 20% in the May 07 quarter, so I don't think fudging earnings for this reason is a problem.

Total Net income over the past ten years is $5,936 million, over the same period they have free cash flow of $6,772 million this is a 14% differential, which over ten years is probably fine.

Ownership

I can't find Willert's direct holdings, but 18% of Best Buy is held by insiders, and considering this is a $17 billion company that's fine with me.

Auditing

Best Buy was audited by Deloitte & Touche, apparently a good company to work for, that I believe is fine here.

Competence

Expenses

Best Buy's only real direct competitor, Circuit City, has 2% higher COGS and 5% higher SG&A than Best Buy, so it looks like management is good at cutting costs.

Debt

Best Buy has $642 million in long-term debt, but over $1.3 billion in cash. It is troublesome that they have over $4 billion in accounts payable, however.

Returns

Best Buy's has a 26% return on equity, but just 11% return on assets which shows they use leverage to pump returns.

Retained Earnings Contrasted to Market Cap

Over the past ten years they have created $3 in market value for every dollar in retained earnings, which shows they are good at creating shareholder value.

Shareholder Communication

Earnings Reports

The report is called, Best Buy's Fourth-Quarter Earnings Per Diluted ShareRise 10% to $1.71, this is satisfactory, but at least they use gaap earnings instead of some pro forma crap (not that gaap isn't crap, its just generally accepted).

The What they say analysis will encompass a post on its own, and will come next.