Best Buy Co., Inc. — Q1 Fiscal 2015 10-Q
Reporting period: 13 weeks ended May 3, 2014; comparable period ended May 4, 2013. Best Buy is a multichannel technology retailer operating Domestic and International segments. Results are seasonal, with a larger share of revenue and earnings typically generated in the fiscal fourth quarter.
Financial results and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $9.035 billion | $9.347 billion |
| Comparable sales | Down 1.9% | Down 1.4% |
| Gross profit / gross margin | $2.020 billion / 22.4% | $2.158 billion / 23.1% |
| Operating income / margin | $197 million / 2.2% | $168 million / 1.8% |
| Net earnings from continuing operations | $461 million | $97 million |
| Diluted EPS from continuing operations | $1.31 | $0.29 |
| Non-GAAP diluted EPS from continuing operations | $0.33 | $0.32 |
| Operating cash flow | $308 million | $(5) million |
Revenue declined 3.3%, including a 0.7% negative foreign-exchange impact. Operating income improved $29 million, mainly from lower SG&A attributed to Renew Blue cost reductions; lower revenue and gross margin partly offset the savings. The reported net-income increase is not representative of underlying operating growth: a $353 million discrete, non-cash tax benefit from a tax election to reorganize certain European legal entities materially boosted earnings. Excluding that benefit and specified adjustments, non-GAAP net earnings were $116 million versus $110 million.
Cash and cash equivalents were $2.569 billion at May 3, 2014, plus $497 million of short-term investments. Total debt, including its current portion, was $1.648 billion. The current ratio was 1.5. Cash declined $109 million during the quarter; investing activities used $362 million, including net purchases of short-term investments, while financing activities used $53 million. The company reported no borrowings on its principal revolving facilities at May 30, 2014, and compliance with financial covenants at May 3, 2014. The $500 million 364-day credit facility was due to expire in June 2014.
Changes and business performance
- Domestic revenue fell 2.1%; comparable sales declined 1.3%. Comparable online sales rose 29.2%, and online revenue reached 8.2% of Domestic revenue. Appliances grew 9.1% on a comparable-sales basis, while consumer electronics fell 4.1% and services fell 13.5%.
- International revenue fell 10.5%, including a 4.6% foreign-exchange impact; comparable sales declined 5.8%. The segment’s operating loss narrowed to $29 million from $54 million, primarily through lower SG&A, despite lower revenue and gross profit.
- Renew Blue delivered a further $95 million of annualized cost reductions in the quarter, bringing cumulative reductions to $860 million toward a $1 billion target. Management also cited improved customer experience measures and market-share gains in the U.S.; these are management assessments.
- Best Buy Europe had been sold in June 2013. Accordingly, prior-year discontinued operations included a $178 million loss attributable to Best Buy shareholders; there were no discontinued-operation results in Q1 FY2015.
Outlook, risks, and unusual items
- Management expected continued industry sales declines and mobile-phone softness in Q2 and Q3 FY2015, absent major product launches, and forecast comparable sales declines in the low single digits in both quarters. It expected continued pressure from price investments, Renew Blue SG&A investments, and the new credit-card agreement, substantially offset by cost reductions. The filing does not provide full-year revenue or earnings guidance.
- Management said the new credit-card agreement reduced Q1 revenue by $47 million, including $16 million of transitional benefits not expected to recur; the impact on gross profit and operating income was substantially similar.
- The tax reorganization accelerated a tax benefit that otherwise would have been recognized over time. Management expected a higher income-tax rate going forward and estimated year-over-year quarterly diluted-EPS impacts from known tax items of flat to positive $0.01 in Q2, flat to negative $0.01 in Q3, and negative $0.09 to $0.10 in Q4. The tax benefit continues to be amortized for cash-tax purposes.
- Key risks identified include consumer demand and confidence, competitive pricing and online sales, product availability and launch cycles, foreign-exchange movements, execution of cost reductions and strategy, supply-chain disruption, and tax matters. The company disclosed ongoing securities litigation and an appeal of a trade-secrets judgment; the filing states that reasonably possible losses for the securities matters could not be estimated. Other legal proceedings were not expected to have a material effect.
- Management stated that disclosure controls were effective at May 3, 2014, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Separate recurring operating performance from the $353 million tax benefit; monitor the stated higher future tax rate and quarterly EPS effects.
- Track comparable sales, gross-margin trends, and whether cost savings can offset pricing, credit-card agreement, and investment pressures.
- Test the durability and profitability of online growth and the weak International segment results.
- Review cash conversion, short-term investment balances, debt and lease obligations, credit-facility renewal, covenant compliance, and credit ratings.
- Monitor the securities and trade-secrets litigation for material developments or changes in estimated exposure.