Business context and reporting period
Best Buy Co., Inc. is a multinational consumer-electronics retailer with Domestic and International segments. This Form 10-Q covers the 13 weeks ended May 4, 2013 (first quarter of fiscal 2014), compared with the 14 weeks ended May 5, 2012. The extra prior-year week and the company’s fiscal-year change limit comparability. Best Buy’s results are seasonal, with historically higher revenue and earnings in the holiday-season fourth quarter.
Financial performance and position
- Revenue: $9.38 billion, down 9.6%; comparable sales declined 1.3%. Management attributed much of the decline to the prior year’s extra week, alongside store closures, comparable-sales weakness and currency effects.
- Profitability: Gross profit was $2.17 billion, with gross margin of 23.1%, down from 24.9%. SG&A was $2.00 billion, or 21.3% of revenue versus 21.1%. Operating income fell 36.4% to $168 million; operating margin was 1.8% versus 2.5%.
- Earnings: Continuing-operations net earnings were $97 million ($0.29 diluted EPS), versus $169 million ($0.49). After a $178 million loss from discontinued operations attributable to Best Buy shareholders, the company reported a net loss attributable to shareholders of $81 million, or $0.24 per share. Adjusted operating income was $186 million versus $405 million, and adjusted diluted EPS from continuing operations was $0.32 versus $0.76; both are non-GAAP measures.
- Cash flow: Operating cash flow was a use of $5 million versus $379 million provided. Investing activities used $116 million, including $174 million of capital expenditures; financing activities used $641 million, primarily reflecting debt repayments. Cash and equivalents excluding held-for-sale amounts were $908 million at quarter-end; $163 million of cash was classified as held for sale.
- Debt and liquidity: Debt, including its current portion, was $1.686 billion; short-term borrowings were zero. Current assets were $10.006 billion and current liabilities $8.561 billion (current ratio 1.2). The company reported compliance with its credit-facility covenants and no borrowings under its U.S. facilities at May 31, 2013. A $500 million note was due July 15, 2013; management said it would evaluate cash, existing facilities or new debt to repay it. Adjusted debt to EBITDAR was 3.2 versus 2.9 at fiscal year-end.
Material changes and management commentary
- The 50% interest in Best Buy Europe was classified as held for sale after an April 29 agreement to sell it to Carphone Warehouse Group for £500 million, less £29 million of agreed costs. Consideration includes cash, deferred cash and CPW shares. Completion was expected in fiscal Q2 2014, subject to shareholder and regulatory approvals.
- The Europe transaction and related restructuring resulted in a $175 million impairment and contributed to discontinued-operations losses. Best Buy Europe also recorded restructuring charges; the quarter’s total restructuring charges were $59 million, including $53 million in discontinued operations. Switzerland fixed-line operations were sold, generating a $28 million gain.
- Under Renew Blue, management reported a 16.3% increase in Domestic comparable online sales, a customer Net Promoter Score improvement of over 300 basis points, and an estimated $175 million in additional annualized SG&A and supply-chain cost reductions, following $150 million estimated in the prior quarter. Management expected further strategy implementation and Samsung Experience Shop rollout in Q2.
- Management cited price investment, higher shrinkage and warranty costs as pressures on Domestic gross margin. International operating loss widened to $54 million from $31 million, with lower revenue and margin partly offset by reduced SG&A.
- No numerical full-year earnings or revenue guidance is provided in the supplied filing text. Management said liquidity sources were expected to be sufficient for operations and anticipated investments, while noting spending might need to be limited if liquidity proved inadequate.
Risks, contingencies and unusual items
- Risks include uncertain consumer spending and confidence, competition and promotional pricing, product-cycle changes, foreign-exchange movements, and execution and approval risks for the Europe sale. Moody’s affirmed Baa2 but changed its outlook to Negative; Fitch and S&P ratings were BB- and BB, respectively, each with a Negative outlook.
- Best Buy is appealing a Techforward judgment and awards totaling approximately $33 million, including exemplary damages and attorney fees. The company said it would contest the decision. Securities actions remained pending, and the company said reasonably possible losses could not be estimated. Its LCD-panel price-fixing case was scheduled for trial in July 2013, with settlement discussions underway.
- Six remaining auction-rate securities, with $23 million par value and $21 million fair value, were subject to failed auctions; timing of access to principal is uncertain. Restricted cash was $287 million.
- Management noted that continuing-operations results were affected by the prior-year extra week, timing of pre-Super Bowl sales, prior-year store closures and increased price competitiveness investment. Interim results are not necessarily indicative of the full year.
Important facts for investors to verify
- Whether the Best Buy Europe sale closed on expected terms and timing, and the realized value of its cash, deferred-cash and share components.
- Progress in stabilizing comparable sales and gross margins, and whether Renew Blue cost savings translate into sustainable operating improvement.
- Funding and repayment of the $500 million July 2013 note, covenant headroom, cash generation and the effect of negative credit-rating outlooks.
- Final outcomes and any financial effects of the Techforward appeal, securities actions and LCD litigation.
- How much of the reported loss reflects nonrecurring impairments and restructuring versus continuing operating trends; reconcile GAAP results with management’s non-GAAP measures.