Best Buy Co., Inc. — Q2 FY2012 Form 10-Q
Reporting period: Quarter ended August 27, 2011; comparisons are with the quarter ended August 28, 2010. Six-month figures cover the first half of FY2012. Dollar amounts are in millions except per-share data. Best Buy operates Domestic and International segments; international results are consolidated on a two-month lag.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Revenue | $11,347 | $11,339 | $22,287 | $22,126 |
| Comparable-store sales | (2.8)% | (0.1)% | (2.3)% | 1.3% |
| Gross profit | $2,872 | $2,918 | $5,640 | $5,711 |
| Gross margin | 25.3% | 25.7% | 25.3% | 25.8% |
| SG&A | $2,583 | $2,507 | $5,067 | $4,987 |
| Operating income | $287 | $411 | $569 | $724 |
| Operating margin | 2.5% | 3.6% | 2.6% | 3.3% |
| Net earnings attributable to Best Buy | $177 | $254 | $313 | $409 |
| Diluted EPS | $0.47 | $0.60 | $0.81 | $0.96 |
| Interest expense | $34 | $21 | $65 | $44 |
Q2 revenue was essentially flat, while operating income fell 30.2% and diluted EPS declined 22%. For the first half, revenue increased 0.7%, but operating income decreased 21.4%. Management attributed the profit pressure principally to lower gross margin, weak comparable sales and higher SG&A. The Q2 effective tax rate was 38.0%, versus 36.1% a year earlier; the first-half rate was 37.8%, versus 37.9%.
Segments and operating trends
- Domestic: Q2 revenue fell 1.5% to $8,311 and comparable sales declined 2.7%. Operating income decreased to $303 from $407. Tablets and appliances grew; televisions, entertainment products and digital imaging were weak. Promotions supported sales but pressured margin.
- International: Q2 revenue rose 4.6% to $3,036, aided by favorable currency translation, but comparable sales fell 3.2%. The segment posted a $16 operating loss versus $4 operating income a year earlier. Europe weakness and promotions weighed on results; Five Star appliance growth and restructuring savings provided offsets.
Cash flow, balance sheet and capital
- Cash flow: First-half operating cash flow was $1,537, compared with $84 in the prior-year period. Investing used $496; financing used $105. Cash increased $937 to $2,040. Operating cash flow benefited from working-capital normalization, including higher accounts payable and receivable collections, and lower incentive compensation payments; the improvement may not represent a recurring earnings trend.
- Liquidity: Cash and short-term investments totaled $2,120 at August 27, 2011. Current assets were $11,501 and current liabilities $9,147; the reported current ratio was 1.3. Restricted cash included in other current assets was $541.
- Debt: Total debt, including short-term and current maturities, was $2,532; long-term debt excluding current maturities was $1,696. Debt increased following the March 2011 issuance of $1,000 of notes: $350 due 2016 at 3.75% and $650 due 2021 at 5.50%. The $402 convertible debentures may be put to the company on January 15, 2012, and are classified as current debt.
- Facilities and credit: No borrowings were outstanding under the company’s $2.3 billion revolving facility, which expires in September 2012. International facilities had $392 outstanding. Best Buy reported covenant compliance. Fitch lowered its rating to BBB− with a stable outlook; Moody’s and S&P ratings were Baa2 and BBB−, both stable.
- Shareholder returns: First-half repurchases totaled $863 for 29.2 million shares. A new $5.0 billion repurchase authorization replaced the prior program; $4,748 remained available at quarter-end. Q2 dividend declared was $0.15 per share; the company announced a subsequent quarterly dividend of $0.16.
Outlook, commentary and risks
- No specific earnings or revenue guidance for FY2012 is provided in the supplied filing text. Management said economic pressure and cautious discretionary spending continued, making traffic and spending difficult to predict. Results are seasonal, with the largest revenue and earnings historically in fiscal Q4.
- Management planned to moderate capital spending while continuing investment in growth areas such as Best Buy Mobile and Five Star in China. It stated that current liquidity sources were expected to support operations and anticipated investment, while cautioning that cash generation, borrowing access and financing terms could change.
- Key business pressures included mature product categories—especially televisions, notebooks, gaming, movies and music—competition, consumer confidence and credit availability, product cycles, promotional pricing, supply availability and foreign-exchange movements. A weaker U.S. dollar benefited reported Q2 revenue by an estimated $251; the net-earnings impact was described as immaterial.
- Restructuring charges were $4 in the first half, mainly related to the Turkey exit and other domestic and international initiatives. The Turkey stores closed in Q2; management did not expect further material charges from the fiscal 2011 restructuring during the rest of FY2012.
- Liquidity risk includes $88 of auction-rate securities carried at fair value, with $93 par value subject to failed auctions and limited access to principal. A $5 pretax unrealized loss was recorded in accumulated other comprehensive income. Management did not intend to sell before recovering full principal.
- A proposed employment-discrimination class settlement received preliminary court approval; it includes policy changes, $0.3 for named plaintiffs and court-approved attorneys’ fees capped at $10. Securities class and derivative actions concerning prior fiscal 2011 guidance remain pending; the company said potential losses, if any, could not be estimated and intends to defend the claims.
Most important facts for investors to verify
- Whether weak comparable sales and lower operating margins persist, particularly in Domestic and Europe, and whether tablet and appliance growth can offset declines in mature categories.
- How much of the unusually strong first-half operating cash flow reflects temporary working-capital timing rather than sustainable cash generation.
- The company’s ability to manage the January 2012 convertible-debenture put, debt maturities, borrowing costs and lease-adjusted leverage; reported adjusted debt/EBITDAR was 2.8 versus 2.5 at fiscal year-end.
- Progress on the new repurchase authorization and the extent to which buybacks affect liquidity and capital allocation during weaker earnings.
- Final approval and costs of the employment settlement, developments in the securities litigation, and any changes in the value or liquidity of auction-rate securities.