Best Buy Co., Inc. — Fiscal 2016 Form 10-K
Business context and reporting period. Best Buy is a technology products, services and solutions retailer operating in the U.S., Canada and Mexico. Fiscal 2016 ended January 30, 2016, and comprised 52 weeks. The company reports Domestic and International segments. Canada’s consolidation of Future Shop and Best Buy under the Best Buy brand involved closing 66 stores and converting 65.
Financial performance
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Revenue | $39.528 billion | $40.339 billion |
| Operating income / margin | $1.375 billion / 3.5% | $1.450 billion / 3.6% |
| Net earnings from continuing operations | $807 million | $1.246 billion |
| Diluted EPS from continuing operations | $2.30 | $3.53 |
| Gross profit / gross margin | $9.191 billion / 23.3% | $9.047 billion / 22.4% |
| Operating cash flow | $1.322 billion | $1.935 billion |
| Cash, cash equivalents and short-term investments | $3.281 billion | $3.888 billion |
Revenue fell 2.0%. Gross margin improved, but reported operating income declined, primarily reflecting higher restructuring charges. Non-GAAP adjusted operating income was $1.566 billion versus $1.497 billion, and adjusted diluted EPS from continuing operations was $2.78 versus $2.60; these company-defined measures exclude specified items and are not GAAP results.
- Domestic: Revenue rose 0.9% to $36.365 billion; operating income increased to $1.585 billion from $1.437 billion. Comparable sales grew 0.5%, but declined 0.1% excluding the estimated benefit from mobile installment billing. Online revenue was approximately $4.0 billion, up 13.5% on a comparable basis.
- International: Revenue fell 26.2% to $3.163 billion and the segment recorded a $210 million operating loss, compared with $13 million operating income. The decline reflected Canadian store closures, a 12.5% adverse foreign exchange impact and softness in Canada.
- Margins and unusual items: Gross margin benefited from $148 million of extended-service-plan profit-share revenue and net CRT/LCD litigation settlement proceeds. Management said the service-plan profit share was unusually high and was not expected to continue at that level. Fiscal 2016 included $201 million of restructuring charges; fiscal 2015 included a $353 million discrete tax benefit from a European legal-entity reorganization.
- Discontinued operations: Fiscal 2016 included $90 million of earnings, primarily the $99 million gain on the sale of Five Star. Total net earnings attributable to shareholders were $897 million, including discontinued operations.
Liquidity, debt and capital allocation
Year-end current ratio was 1.4, down from 1.5. Total debt, including the current portion, was $1.734 billion; the company also reported $1.25 billion of available capacity under its revolving credit facility and no facility borrowings. The $350 million notes due March 2016 were repaid after year-end using existing cash. Fiscal 2016 capital expenditures were $649 million, and the company estimated fiscal 2017 cash capital expenditures of $650–$700 million. Contractual operating lease obligations totaled $3.363 billion, excluding an estimated $1.1 billion of real estate taxes and common-area maintenance charges.
Fiscal 2016 cash returned to shareholders included $1.0 billion of share repurchases and $499 million of dividends. On February 25, 2016, Best Buy announced a 22% increase in its regular quarterly dividend to $0.28 per share, a $0.45-per-share special dividend, and an intention to repurchase $1.0 billion of shares over two years.
Outlook, management commentary and risks
For fiscal 2017, management targeted flat Domestic segment revenue and approximately flat operating income, with revenue declines expected in the first half followed by growth in the second half. The outlook assumed continued market-share gains and cost and gross-profit initiatives, despite a soft consumer-electronics market and the expected absence of fiscal 2016’s unusually high service-plan profit-share benefit. Management reported $150 million of annualized savings toward its three-year $400 million Renew Blue Phase 2 target, leaving $250 million, and expected approximately $100 million of investments in fiscal 2017.
- Key risks include intense price competition, margin pressure and rapid changes in product technology and consumer demand.
- Supplier concentration is material: five suppliers accounted for approximately 51% of merchandise purchases, and the company generally has no long-term supply contracts with major vendors.
- Other disclosed risks include execution of the Canada transformation, foreign exchange exposure, seasonal dependence on holiday-quarter results, service and warranty performance, supply-chain disruption, cybersecurity and information-system failures, and access to vendor credit or financing.
- The company reported $469 million of unrecognized tax benefits; the timing and amount of any resolution were uncertain. A securities class action remained pending on appeal, and the company said reasonably possible losses, if any, could not be estimated. Further Canada transformation charges of up to $35 million were possible.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management reported effective controls and no material weaknesses.
Investor facts to verify
- Whether Domestic sales and operating income meet fiscal 2017 targets, particularly given expected first-half weakness and product-cycle uncertainty.
- Whether Canadian operations stabilize after the closures and brand consolidation, and whether further impairment or exit costs arise.
- How much the $148 million service-plan profit-share benefit contributed to fiscal 2016 margin and whether its expected decline is offset by recurring improvements.
- Whether operating cash flow supports planned capital spending, dividends and repurchases while maintaining liquidity and credit metrics.
- Developments in tax audits, securities litigation and the remaining CRT/LCD proceedings and any related cash or earnings effects.