Business context and reporting period
Best Buy Co., Inc. is a multinational retailer of consumer electronics, computing and mobile products, appliances, entertainment products and related services. This Form 10-K covers fiscal 2012, ended March 3, 2012; the year had 53 weeks versus 52 weeks in fiscal 2011. Results are reported for Domestic and International segments. Europe, China and Mexico results are generally consolidated on a two-month lag.
For fiscal Q4, revenue was $16.63 billion, comparable sales declined 2.4%, operating income was $69 million and the net loss attributable to Best Buy was $1.698 billion, or $4.89 per diluted share. The quarter included the major impairment and profit-share buy-out items described below.
Financial performance and liquidity
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Revenue | $50.705 billion | $49.747 billion |
| Comparable sales | Down 1.7% | Down 1.8% |
| Gross profit rate | 24.8% | 25.2% |
| Operating income | $1.085 billion; 2.1% margin | $2.374 billion; 4.8% margin |
| Continuing-operations earnings, including noncontrolling interests | $330 million | $1.554 billion |
| Net earnings (loss) attributable to Best Buy | $(1.231) billion; $(3.36) per diluted share | $1.277 billion; $3.08 per diluted share |
| Cash from operations | $3.293 billion | $1.190 billion |
| Capital expenditures | $766 million | $744 million |
Revenue rose 1.9%, supported by net new stores, the extra week and favorable currency effects, partly offset by comparable-sales weakness. Domestic revenue was $37.615 billion and operating income $1.855 billion, down from $2.054 billion. International revenue was $13.090 billion; the segment recorded a $770 million operating loss, primarily due to goodwill impairment.
Cash and cash equivalents were $1.199 billion at year-end; working capital was $1.4 billion and the current ratio was 1.2. Total debt, including current maturities, was $2.208 billion, compared with $1.709 billion a year earlier. The company had $2.8 billion of undrawn credit capacity and was in compliance with its financial covenants. Operating cash flow increased substantially, primarily because accounts payable normalized and inventory declined; this increase should not be assumed to represent a recurring earnings trend.
Best Buy repurchased $1.5 billion of shares and paid $228 million of dividends in fiscal 2012. The quarterly dividend was raised to $0.16 per share for the final two quarters. Operating lease obligations totaled $7.517 billion, excluding $2.1 billion of estimated real estate taxes and common-area costs.
Material changes versus prior period
- Revenue grew 1.9%, while comparable sales remained negative at 1.7% versus a 1.8% decline in fiscal 2011.
- Operating income fell 54.3%, and operating margin contracted to 2.1% from 4.8%. Gross margin declined 0.4 percentage points, mainly due to increased promotions and a higher mix of promotional products.
- A $1.207 billion non-cash goodwill impairment fully wrote off Best Buy Europe reporting-unit goodwill after the Mobile profit-share agreement buy-out and strategic changes.
- Best Buy paid $1.303 billion to buy out Carphone Warehouse’s interest in the Best Buy Mobile profit-share agreement. The payment was recorded in earnings attributable to noncontrolling interests and as a financing cash outflow.
- Discontinued operations produced a $308 million loss including noncontrolling interests, compared with a $188 million loss in fiscal 2011. Exits included large-format Best Buy stores in China, Turkey and the U.K., Belgium Phone House stores, and Napster and Speakeasy operations.
- Fiscal 2012 ended with 54.6 million shares repurchased and total equity of $4.366 billion, down from $7.292 billion; the loss, buy-out and repurchases contributed to the decline.
Outlook, management commentary and risks
Management described continued consumer caution, price transparency and weak demand in televisions, notebook computers, gaming and music. Tablets, e-readers, mobile phones and appliances were relative growth areas. Domestic promotional activity helped customer traffic but pressured margins.
- Management targeted $800 million of cost reductions by fiscal 2015, including $250 million expected in fiscal 2013. Planned actions cover stores, corporate/support costs and cost of goods sold.
- Fiscal 2013 plans included closing approximately 50 large-format U.S. Best Buy stores, opening approximately 100 U.S. Best Buy Mobile stand-alone stores and opening approximately 50 Five Star stores in China. The company also planned Connected Store pilots and expected capital expenditures to remain broadly consistent with fiscal 2012.
- The company estimated $300–$350 million of pre-tax restructuring charges for the transformation actions, including $140–$160 million in fiscal Q1 2013; $30–$40 million of total charges were expected to be non-cash. Actual costs could differ.
- Fitch affirmed the BBB- rating and revised its outlook to negative in April 2012; Moody’s and S&P maintained investment-grade ratings with stable outlooks. Management stated the rating changes had not materially affected current borrowing costs.
- Key risks include intense online and store-based competition, discretionary-spending and product-cycle volatility, vendor concentration (five suppliers represented 40% of merchandise purchases), execution of restructuring and growth plans, international and foreign-exchange exposure, credit-facility access, and data-security and legal risks. Promotional-financing card sales were 20% of Domestic revenue.
- CEO Brian Dunn resigned effective April 10, 2012; George Mikan became interim CEO while the board searched for a permanent CEO. The Audit Committee opened an independent investigation into allegations concerning Dunn’s personal conduct.
- Shareholder securities litigation related to prior earnings guidance remained unresolved procedurally: a court dismissed the consolidated action with prejudice, but plaintiffs sought to alter or amend that decision. The company said potential losses could not be estimated.
Important facts for investors to verify
- Reconcile the $1.303 billion Mobile buy-out, its presentation in noncontrolling-interest earnings and financing cash flows, and the related $1.207 billion goodwill impairment.
- Assess recurring profitability and cash conversion separately from impairment, restructuring, discontinued operations and working-capital timing effects.
- Track comparable sales, gross-margin trends and whether the planned $800 million cost savings are achieved without undermining sales or customer experience.
- Verify restructuring charges, store-closure and lease-exit costs, and the pace and returns of U.S. Mobile, Connected Store and China expansion.
- Monitor debt maturities, International borrowings, credit ratings, lease obligations and liquidity after buy-backs, dividends and transformation spending.
- Review subsequent filings for the leadership transition, investigation outcome, securities litigation, and any changes to the outlook or planned capital allocation.