Business context and reporting period
Best Buy Co., Inc. filed this unaudited Form 10-Q for the quarter ended August 2, 2014, the second quarter of fiscal 2015. The retailer operates Domestic and International segments and sells technology products and services through stores and online. Results are seasonal, with a larger share of revenue and earnings typically generated in the holiday-season fourth quarter.
Financial performance and liquidity
Unless stated otherwise, amounts are in millions of dollars. Quarter and six-month comparisons are with the corresponding fiscal 2014 periods.
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $8,896; down 4.0% | $17,931; down 3.7% |
| Comparable sales | Down 2.7% | Down 2.3% |
| Gross profit / margin | $2,055 / 23.1% | $4,075 / 22.7% |
| Operating income / margin | $238 / 2.7% | $435 / 2.4% |
| Continuing-operations net earnings attributable to Best Buy shareholders | $145; diluted EPS $0.42 | $606; diluted EPS $1.73 |
| Non-GAAP diluted EPS from continuing operations | $0.44 | $0.77 |
Quarterly SG&A was $1,812, or 20.4% of revenue, versus $2,038, or 22.0%, a year earlier. Cash from operations for the six months was $487, compared with $19; investing used $907 and financing used $114. Cash and cash equivalents were $2,141 and short-term investments $939 at quarter-end, totaling $3,080. Current ratio was 1.5.
Debt carrying value, including current maturities, was $1,635. Best Buy had no borrowings under its new $1.25 billion five-year revolving facility and no borrowings under its International revolving facilities; $146 was available under the latter. It reported compliance with financial covenants. Non-GAAP debt to EBITDAR was 3.5.
Material changes versus prior comparable periods
- Quarterly GAAP operating income declined to $238 from $413, and continuing-operations diluted EPS fell to $0.42 from $0.69. Prior-year results included $229 of net LCD-related legal settlements; excluding those settlements and other specified items, non-GAAP operating income rose to $256 from $206 and non-GAAP diluted EPS to $0.44 from $0.32.
- Gross margin fell 3.4 percentage points in the quarter. The prior-year LCD settlements were the largest comparison factor; excluding them, management cited lower-margin product mix, price investments and less favorable credit-card agreement economics, partly offset by cost reductions.
- Six-month net earnings included a $353 noncash tax benefit from a tax reorganization. Without it, management said the six-month effective tax rate would have been 37.2%, rather than the reported negative 50.0%.
- Domestic quarterly comparable sales declined 2.0%; comparable online sales rose 22.0%. International comparable sales declined 6.7%, and the segment recorded a $20 operating loss.
Outlook, commentary and risks
- Management expected comparable sales to decline in the low single digits in both the third and fourth quarters of fiscal 2015, assuming industry trends persisted. It expected non-GAAP operating-income-rate improvement in each quarter in line with the year-over-year improvement achieved in the first half, while noting fixed-cost deleverage and continued category and regional pressures.
- Management planned $40–$50 of additional second-half investment in customer-facing initiatives, including $10–$15 in the third quarter and $30–$35 in the fourth quarter, estimated to reduce second-half diluted EPS by $0.07–$0.09. It expected the tax reorganization benefit to provide no future earnings benefit and forecast a higher income tax rate going forward.
- Renew Blue cost reductions reached $900 of the $1 billion annualized target, including a further $40 of annualized costs eliminated in the quarter. Cost reductions and tighter expense management supported results, but management also described declining store traffic, weak consumer-electronics and mobile-phone demand, promotional pressure, online-sales mix pressure on margins, and foreign-exchange exposure.
- Domestic online sales growth and ship-from-store fulfillment were strategic positives. Management cited more than $400 in estimated annual losses historically associated with returns, replacements and damages and said it was introducing procedures to reduce them.
- A securities class was certified in an ongoing case concerning fiscal 2011 guidance; Best Buy appealed the certification order, and the appeal was pending. The company said potential losses could not be estimated and intended to defend the case. A confidential settlement of the Techforward trade-secrets case had no material impact on financial position or results.
- The company declared a regular quarterly dividend of $0.19 per share for payment in October, up from the $0.17 per share paid during the quarter.
Important facts for investors to verify
- Reconcile the reported GAAP decline with the prior-year $229 LCD settlements and the company’s non-GAAP adjustments.
- Assess whether sales trends, especially International performance and mobile-phone demand, align with the low-single-digit comparable-sales outlook.
- Track gross-margin pressures, online-sales mix, credit-card agreement economics and whether Renew Blue savings offset them.
- Separate recurring earnings and cash generation from the $353 one-time tax benefit; monitor the resulting tax rate.
- Review cash-flow timing, investment purchases, debt and lease-adjusted leverage, credit-facility availability, and the pending securities-litigation appeal.