97I
t’s tempting for companies to focus on
short-term profitability, especially when
Wall Street is watching earnings reports,
looking for any signs of weakness that
could send the stock plummeting. This
was the dilemma facing the executive
team at Best Buy,a specialty retailer of consumer electronics, home office equipment, entertain-
ment software, and appliances. After four straight years of profits in this competitive retail busi-
ness, revenues and quarterly earnings were falling as the economy started to downshift in fall- On the planning boards was an expansion strategy that included acquiring the Musicland
chain, using Best Buy stock to do so. As the stock price fell, some top managers urged founder
and CEO Richard Schulze to retrench and focus on the chain’s over 400 existing stores.
Instead of putting Best Buy’s growth on hold, Schulze went forward as planned. He was con-
vinced that this was the best long-term strategy for the company, which was financially sound.
Careful planning had given Best Buy a $1 billion “war chest,” so Schulze could buy Musicland with
cash and the assumption of its debt. Best Buy also bought a Seattle chain, Magnolia Hi-Fi, for
cash. Some company officers were concerned about buying Musicland when the company’s
stock price was down. “It doesn’t change why we think this is a good deal,” Schulze pointed out.
The acquisition was important to Best Buy’s future plans. Musicland, which also owned the
Sam Goody chain, had 1,300 stores. Most were smaller than the typical Best Buy “big-box” store.
Their mall and small-town locations brought a different customer base to the company, providing a
way to reach new types of customers and gain further leverage with suppliers.
Nor did the company neglect short-term planning. To boost productivity and reduce labor
costs during the downturn, Best Buy cut sales staff during off-peak hours. It found ways to
improve inventory management as well. With these plans in place, earnings were up in the fourth
quarter of 2000, and the company reported record sales and a 20 percent increase in gross margin.
Despite the risks involved in taking this aggressive path, Schulze is more concerned with posi-
tioning Best Buy for the future. Opening new stores means higher expenses in the short term. But
he is confident that he made the right decision in sticking with the company’s long-term strategy to
become the world’s biggest consumer electronics chain. “Acquisitions and new strategies need
to be developed even when the economy is a little soft,” says Schulze. “You have to keep investing
in yourself, and that’s what we’re doing.”
This chapter focuses on the concept of cash flows and their use in the financial planning
process.
BESTBUY
PLANNINGTHAT
“BESTBUY”