Business context and reporting period
Best Buy Co., Inc. is a specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services, operating Domestic and International segments. This unaudited Form 10-Q covers the second quarter and six months of fiscal 2010, ended August 29, 2009. The company notes that results are seasonal, with the fourth quarter typically strongest; interim results may not indicate full-year performance. Europe, China and Mexico results are consolidated on a two-month lag.
Financial performance
Amounts are in millions except per-share data. Comparisons are with the corresponding fiscal 2009 periods.
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $11,022; +12% | $21,117; +12% |
| Comparable-store sales | -3.9% | -5.0% |
| Gross profit / rate | $2,684 / 24.4% (24.3%) | $5,241 / 24.8% (24.0%) |
| Operating income / rate | $280 / 2.5% ($339 / 3.5%) | $576 / 2.7% ($616 / 3.3%) |
| Net earnings attributable to Best Buy | $158 ($202) | $311 ($381) |
| Diluted EPS | $0.37 ($0.48) | $0.74 ($0.91) |
| Cash provided by operating activities | Not presented as a quarterly figure | $238 ($50) |
Second-quarter gross margin edged up, but SG&A was 21.8% of revenue versus 20.8% a year earlier. For the six months, SG&A was also 21.8%, compared with 20.7%. Interest expense was $22 for the quarter and $45 for the half-year, versus $21 and $34, respectively. Effective tax rates were 42.8% for the quarter and 43.9% for the half-year, up from 37.3% and 37.2%.
At August 29, cash and cash equivalents were $668 and short-term investments were $93. Current assets were $9,304 against current liabilities of $8,964 (current ratio 1.0). Total debt, including current maturities, was $2,247; total shareholders’ equity was $5,899. The debt-to-capitalization ratio was 30%, while management’s lease-adjusted measure was 67%.
Material changes and management commentary
- Reported revenue growth was principally acquisition- and store-driven: Best Buy Europe contributed $1.2 billion in the quarter and $2.6 billion in the half-year; net new stores also contributed. These gains were partly offset by comparable-sales declines and unfavorable currency effects.
- Domestic quarterly revenue rose 2%, but comparable sales fell 3.1%; operating income was flat at $315. International revenue rose 65%, substantially reflecting Best Buy Europe, but the segment recorded a $35 operating loss, versus $24 of income a year earlier. International comparable sales fell 8.3%.
- Management attributed weaker Domestic comparisons largely to lower average ticket and softness in video gaming, digital cameras, DVDs and CDs; notebook computers, mobile phones and flat-panel televisions partly offset declines. International weakness included Canada and several electronics and computer categories.
- Fiscal 2010 first-half results included $52 of restructuring charges ($25 Domestic and $27 International); none was recorded in the second quarter. Management said announced restructuring was substantially complete, while noting further charges cannot be ruled out.
- Cash from operations was $238, compared with $50. Capital expenditures were $310, down from $502. Cash increased $170 during the half-year. Financing activities provided $218, including $2,967 of borrowings and $2,680 of repayments.
Outlook, liquidity and risks
The filing provides no specific revenue or earnings forecast. Management believed available cash, operating cash generation and credit facilities would be sufficient to support operations, announced restructuring, expansion plans and strategic initiatives for the remainder of fiscal 2010. It cautioned that weaker cash generation or reduced borrowing access could require limiting expansion or foregoing opportunities.
A Best Buy Europe subsidiary entered into a £350 receivables-financing agreement in the quarter, with no amount drawn at August 29; it drew the full available £245 (about $401) in September. The facility is secured by specified receivables, has financial covenants and is not guaranteed by Best Buy Co., Inc. Best Buy’s $2.32 billion unsecured revolving credit facility had $325 outstanding at quarter-end; the company reported compliance with its financial covenants. International facilities had $766 outstanding at quarter-end.
The company held $298 fair value of auction-rate securities (ARS), all subject to failed auctions; most were backed by student loans with U.S. government guarantees. The securities were valued using Level 3 inputs, and the company recorded an $8 pre-tax unrealized loss. UBS rights cover $89 at par, exercisable between June 2010 and July 2012; management planned to exercise them in fiscal 2011. The company may incur further valuation losses, and much of the ARS principal remains inaccessible pending liquidity or maturity events.
Other risks include foreign-exchange exposure, consumer demand and retail-industry conditions, margins, product availability, competition, and access to credit. Management estimated that the stronger U.S. dollar reduced second-quarter revenue by about $86 and net earnings by about $2. A 100-basis-point change in credit-facility rates would change annual pre-tax earnings by an estimated $11. Ordinary-course legal proceedings were not expected to materially affect results or financial condition. The company reported effective disclosure controls; it had not yet fully evaluated acquired Best Buy Europe’s and Napster’s internal controls.
Important facts for investors to verify
- Whether comparable-sales trends and International operating losses improve, and how results develop after separating acquisition, store-growth and currency effects.
- The sustainability of operating cash flow, working-capital movements and the funding needs of the European business, including the September receivables-facility draw.
- ARS liquidity, valuation assumptions, recoverability and timing of the planned UBS-rights exercise.
- The effect of restructuring, acquisition-related amortization, foreign exchange, tax rates and elevated SG&A on future earnings and margins.
- Debt capacity, covenant compliance, lease-adjusted obligations and any changes in credit ratings or access to financing.