BEST BUY CO INC annual report, FY2014

Business context and reporting period

Best Buy Co., Inc. is a multi-channel technology retailer offering products and Geek Squad services through stores, websites and call centers. This Form 10-K covers the fiscal year ended February 1, 2014 (“FY2014”), with Domestic and International segments. The filing’s “2013” comparison period was an 11-month transition year, not a full year; FY2014 revenue comparisons therefore include an extra month and are not directly like-for-like. The fiscal fourth quarter included the holiday season.

Key financial metrics

MetricFY2014Prior comparison
Revenue$42.410 billion$39.827 billion in the 11-month FY2013 period
Comparable salesDown 0.8% overall; Domestic down 0.4%, International down 3.1%Down 3.4% overall in FY2013
Gross profit / rate$9.690 billion / 22.8%$9.298 billion / 23.3%
Operating income (loss) / margin$1.140 billion / 2.7%$(119) million / (0.3)%
Net earnings from continuing operations$689 million; diluted EPS $1.98$(467) million; diluted loss per share $1.38
Net earnings attributable to Best Buy shareholders$532 million, including a $155 million loss from discontinued operations$(441) million
Operating cash flow$1.094 billion$1.454 billion
Capital expenditures$547 million$705 million
Cash and short-term investments$2.678 billion cash; $223 million short-term investments$1.826 billion cash; no short-term investments reported
Debt and liquidity$1.657 billion debt including current portion; $3.0 billion working capital; 1.4 current ratio$2.296 billion debt in selected data; $1.2 billion working capital

FY2014 gross margin fell 0.5 percentage points, primarily from price investments and a more promotional environment. SG&A declined to 19.8% of revenue from 20.5%, reflecting cost reductions and expense controls. Adjusted operating income was $1.171 billion, down $301 million from the recast prior-year measure of $1.472 billion; adjusted operating margin was 2.8%. These non-GAAP figures exclude specified items and should be considered alongside GAAP results.

In the fourth quarter, revenue was $14.470 billion, comparable sales declined 1.2%, operating income was $469 million, and continuing-operations net earnings were $311 million, or $0.88 diluted EPS.

Material changes versus the prior comparable period

  • Reported operating results recovered from a loss to profit, but comparison is affected by the additional FY2014 month and FY2013’s $822 million goodwill impairment and $414 million restructuring charges. FY2014 included $159 million of restructuring charges.
  • Revenue growth of 6.5% included an estimated 8.0% contribution from the extra month; comparable sales, store changes and currency effects were negative.
  • Domestic comparable sales improved to a 0.4% decline from a 1.7% decline. Appliances (+16.7%) and Computing and Mobile Phones (+4.7%) grew, while Entertainment (−16.3%) and Consumer Electronics (−5.6%) declined.
  • International revenue was down 0.4% despite the additional month; comparable sales declined 3.1%. International operating loss narrowed to $5 million from $850 million, largely because FY2013 included $819 million of goodwill impairment.
  • Best Buy sold its 50% interest in Best Buy Europe in June 2013 and sold mindSHIFT on February 1, 2014. Both were reported in discontinued operations; FY2014 discontinued operations included a $166 million loss on a consolidated basis.
  • Cash increased by $852 million, although operating cash flow fell $360 million. The company made no share repurchases and paid $0.68 per share in dividends.

Outlook, management commentary, risks and unusual items

  • Management said Renew Blue had delivered $765 million in annualized cost reductions by FY2014, exceeding its original $725 million multi-year target, and raised the target to $1 billion. It cited online revenue growth of nearly 20% and progress toward stabilizing Domestic sales.
  • Long-term non-GAAP targets are a 5%–6% operating income rate and 13%–15% return on invested capital; these are targets, not FY2015 guidance.
  • For FY2015, management estimated $150 million–$200 million less credit-card-agreement revenue than FY2014. It expected price investments, incremental transformation spending, higher mobile warranty claims and the Citibank credit-card arrangement to weigh on operating margin in the first three quarters, partly offset by cost savings.
  • Management anticipated a first-quarter FY2015 legal-entity reorganization that could accelerate a non-cash tax benefit of approximately $310 million–$365 million, contributing to a lower annual effective tax rate.
  • FY2014 included $264 million of gross LCD settlement proceeds in cost of goods sold and $35 million of associated legal expenses in SG&A; $88 million of settlement proceeds remained receivable at year-end. The filing also reports an adverse trade-secrets jury award of $22 million, plus $5 million in exemplary damages and $6 million in attorneys’ fees and costs; Best Buy appealed.
  • Liquidity included $2.0 billion of available U.S. revolving credit capacity and no borrowings under those facilities at year-end. The company reported compliance with financial covenants. Credit ratings were S&P BB/Stable, Fitch BB−/Stable and Moody’s Baa2/Negative.
  • Key risks include intense price competition, product and technology shifts, supplier concentration (five suppliers represented about 45% of merchandise purchases), seasonal dependence, international and currency exposure, customer-data security, vendor financing terms, and substantial lease commitments. Operating lease obligations totaled $5.033 billion, excluding an additional $1.5 billion of estimated real estate taxes and common-area maintenance.

Important facts for investors to verify

  1. Normalize comparisons for the 12-month FY2014 versus 11-month FY2013 periods, and distinguish reported recovery from the effects of impairments, restructuring, settlements and discontinued operations.
  2. Track comparable sales and gross margin, particularly whether Domestic price investments and International promotional pressure ease without undermining sales.
  3. Assess whether management achieves the revised $1 billion cost-reduction target and whether savings translate into improved adjusted operating income.
  4. Monitor actual Citibank credit-card economics, including the forecast revenue decline, and the extent and timing of the anticipated tax benefit.
  5. Review cash conversion, working-capital movements, lease obligations, debt maturities, credit ratings and access to revolving facilities.
  6. Follow the resolution and financial exposure of the appealed trade-secrets judgment, remaining LCD settlement collections and other disclosed contingencies.