Best Buy Co., Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended May 28, 2011; comparison is the three months ended May 29, 2010. Best Buy is a multinational retailer of consumer electronics, computing and mobile products, entertainment, appliances and related services. Results are seasonal, with the largest revenue and earnings historically in the fourth quarter.
Financial performance
| Metric | Q1 FY2012 | Prior-year quarter |
|---|---|---|
| Revenue | $10.940 billion | $10.787 billion |
| Gross profit / margin | $2.768 billion / 25.3% | $2.793 billion / 25.9% |
| Operating income / margin | $282 million / 2.6% | $313 million / 2.9% |
| Net earnings attributable to Best Buy | $136 million | $155 million |
| Diluted EPS | $0.35 | $0.36 |
| Cash from operating activities | $1.324 billion | $169 million |
- Revenue grew 1.4%, but comparable sales declined 1.7%. Growth reflected new stores and favorable foreign exchange, partly offset by lower comparable sales.
- Gross profit fell $25 million; the gross margin declined 0.6 percentage points. Operating income decreased 9.9%, primarily due to the lower gross margin, partly offset by a lower SG&A rate.
- Domestic revenue declined 0.8% and operating income fell to $234 million from $298 million. International revenue rose 7.6% and operating income increased to $48 million from $15 million; foreign currency contributed 4.6 percentage points to international revenue growth.
- Domestic online revenue increased 12%. Tablets and mobile phones were growth areas, while television, physical entertainment media and digital imaging faced pressure.
- The 37.6% effective tax rate was below 40.3% a year earlier, primarily due to increased tax benefits from foreign operations. Interest expense rose to $31 million from $23 million, mainly following new debt issuance.
Cash, liquidity and debt
- Cash and cash equivalents were $2.208 billion at quarter-end; cash plus short-term investments totaled $2.228 billion. Current assets were $11.293 billion and current liabilities $8.736 billion; the reported current ratio was 1.3.
- Operating cash flow of $1.324 billion was substantially higher than the prior-year $169 million, mainly due to normalization of receivables and accounts payable after unusual fiscal year-end balances. Inventory growth partly offset the inflow. Investing activities used $186 million, including $202 million of property and equipment additions; financing activities used $37 million.
- Total debt, including current debt, was $2.180 billion, versus $1.709 billion at fiscal year-end. The company issued $350 million of 3.75% notes due 2016 and $650 million of 5.50% notes due 2021, receiving $990 million net proceeds. The debt-to-net-earnings ratio was 1.6 and adjusted debt-to-EBITDAR was 2.6, compared with 1.3 and 2.5 at fiscal year-end.
- The $2.3 billion revolving credit facility had no borrowings outstanding; $577 million was available under international facilities, with $39 million drawn. The company reported compliance with financial covenants.
- Cash from operations, cash balances and credit facilities are identified as key liquidity sources. Management believes they are sufficient for operations, planned expansion and strategic initiatives, while cautioning that future cash generation and access to financing are not assured.
Material changes, outlook and risks
- Best Buy repurchased 16.6 million shares for $505 million during the quarter. In June 2011, the board authorized a new $5.0 billion repurchase program, replacing the prior program. The quarterly dividend was increased from $0.15 to $0.16 per share, effective with the dividend expected in October 2011.
- Management expects less than $5 million of additional Domestic restructuring charges and approximately $10 million of International restructuring charges in the remainder of FY2012, and expects to substantially complete the actions during FY2012. These relate to domestic efficiencies, restructuring in China and the planned Turkey exit; Turkey stores remained open during the quarter.
- Management described economic conditions and discretionary spending as challenging and uncertain, with declines in televisions, DVDs and CDs pressuring revenue and gross profit. It cited progress in Best Buy Mobile, online channels and China’s Five Star business, and plans to prioritize profitable growth while moderating large-format expansion in mature markets. No numerical sales or earnings guidance is provided in the filing text.
- Risks include consumer confidence and credit availability, competition and promotional pricing, product life-cycle shifts, product availability and supply-chain disruption, foreign exchange, and execution of new ventures. Japan-related supply interruptions affected digital imaging products. Fitch lowered its rating to BBB- with a stable outlook; Moody’s and S&P ratings were Baa2 and BBB-, both stable.
- Failed auctions left $99 million of auction-rate securities valued at fair value, including a $2 million pre-tax unrealized loss. Principal may remain inaccessible until auctions recover, another buyer is found, issuers refinance, or contractual maturities arrive. The company intends to hold the securities and says other liquidity sources allow it to do so.
- A proposed settlement in the employment discrimination action remained subject to court approval; terms included $0.3 million for named plaintiffs and attorneys’ fees and costs capped at $10 million. Securities class and derivative actions concerning fiscal 2011 earnings guidance were pending; the company disputes the allegations and says their potential financial impact cannot be meaningfully quantified.
- Management concluded disclosure controls were effective as of May 28, 2011, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable-sales trends and gross-margin pressure improve, particularly in consumer electronics and entertainment.
- Whether operating cash flow normalizes after the large working-capital-driven inflow in this quarter.
- Debt levels, refinancing and credit ratings, including the near-term put option on $402 million of convertible debentures in January 2012.
- Progress and remaining costs of restructuring and the Turkey exit, along with the performance of growth initiatives.
- Developments in the failed-auction securities and pending litigation, including court approval of the proposed employment settlement.
- Execution of the newly authorized repurchase program and dividend increase relative to cash needs and leverage.