Business context and reporting period
Best Buy Co., Inc. is a multi-channel technology retailer offering products and Geek Squad services through stores, websites and call centers. This Form 10-K covers the fiscal year ended February 1, 2014 (“FY2014”), with Domestic and International segments. The filing’s “2013” comparison period was an 11-month transition year, not a full year; FY2014 revenue comparisons therefore include an extra month and are not directly like-for-like. The fiscal fourth quarter included the holiday season.
Key financial metrics
| Metric | FY2014 | Prior comparison |
|---|---|---|
| Revenue | $42.410 billion | $39.827 billion in the 11-month FY2013 period |
| Comparable sales | Down 0.8% overall; Domestic down 0.4%, International down 3.1% | Down 3.4% overall in FY2013 |
| Gross profit / rate | $9.690 billion / 22.8% | $9.298 billion / 23.3% |
| Operating income (loss) / margin | $1.140 billion / 2.7% | $(119) million / (0.3)% |
| Net earnings from continuing operations | $689 million; diluted EPS $1.98 | $(467) million; diluted loss per share $1.38 |
| Net earnings attributable to Best Buy shareholders | $532 million, including a $155 million loss from discontinued operations | $(441) million |
| Operating cash flow | $1.094 billion | $1.454 billion |
| Capital expenditures | $547 million | $705 million |
| Cash and short-term investments | $2.678 billion cash; $223 million short-term investments | $1.826 billion cash; no short-term investments reported |
| Debt and liquidity | $1.657 billion debt including current portion; $3.0 billion working capital; 1.4 current ratio | $2.296 billion debt in selected data; $1.2 billion working capital |
FY2014 gross margin fell 0.5 percentage points, primarily from price investments and a more promotional environment. SG&A declined to 19.8% of revenue from 20.5%, reflecting cost reductions and expense controls. Adjusted operating income was $1.171 billion, down $301 million from the recast prior-year measure of $1.472 billion; adjusted operating margin was 2.8%. These non-GAAP figures exclude specified items and should be considered alongside GAAP results.
In the fourth quarter, revenue was $14.470 billion, comparable sales declined 1.2%, operating income was $469 million, and continuing-operations net earnings were $311 million, or $0.88 diluted EPS.
Material changes versus the prior comparable period
- Reported operating results recovered from a loss to profit, but comparison is affected by the additional FY2014 month and FY2013’s $822 million goodwill impairment and $414 million restructuring charges. FY2014 included $159 million of restructuring charges.
- Revenue growth of 6.5% included an estimated 8.0% contribution from the extra month; comparable sales, store changes and currency effects were negative.
- Domestic comparable sales improved to a 0.4% decline from a 1.7% decline. Appliances (+16.7%) and Computing and Mobile Phones (+4.7%) grew, while Entertainment (−16.3%) and Consumer Electronics (−5.6%) declined.
- International revenue was down 0.4% despite the additional month; comparable sales declined 3.1%. International operating loss narrowed to $5 million from $850 million, largely because FY2013 included $819 million of goodwill impairment.
- Best Buy sold its 50% interest in Best Buy Europe in June 2013 and sold mindSHIFT on February 1, 2014. Both were reported in discontinued operations; FY2014 discontinued operations included a $166 million loss on a consolidated basis.
- Cash increased by $852 million, although operating cash flow fell $360 million. The company made no share repurchases and paid $0.68 per share in dividends.
Outlook, management commentary, risks and unusual items
- Management said Renew Blue had delivered $765 million in annualized cost reductions by FY2014, exceeding its original $725 million multi-year target, and raised the target to $1 billion. It cited online revenue growth of nearly 20% and progress toward stabilizing Domestic sales.
- Long-term non-GAAP targets are a 5%–6% operating income rate and 13%–15% return on invested capital; these are targets, not FY2015 guidance.
- For FY2015, management estimated $150 million–$200 million less credit-card-agreement revenue than FY2014. It expected price investments, incremental transformation spending, higher mobile warranty claims and the Citibank credit-card arrangement to weigh on operating margin in the first three quarters, partly offset by cost savings.
- Management anticipated a first-quarter FY2015 legal-entity reorganization that could accelerate a non-cash tax benefit of approximately $310 million–$365 million, contributing to a lower annual effective tax rate.
- FY2014 included $264 million of gross LCD settlement proceeds in cost of goods sold and $35 million of associated legal expenses in SG&A; $88 million of settlement proceeds remained receivable at year-end. The filing also reports an adverse trade-secrets jury award of $22 million, plus $5 million in exemplary damages and $6 million in attorneys’ fees and costs; Best Buy appealed.
- Liquidity included $2.0 billion of available U.S. revolving credit capacity and no borrowings under those facilities at year-end. The company reported compliance with financial covenants. Credit ratings were S&P BB/Stable, Fitch BB−/Stable and Moody’s Baa2/Negative.
- Key risks include intense price competition, product and technology shifts, supplier concentration (five suppliers represented about 45% of merchandise purchases), seasonal dependence, international and currency exposure, customer-data security, vendor financing terms, and substantial lease commitments. Operating lease obligations totaled $5.033 billion, excluding an additional $1.5 billion of estimated real estate taxes and common-area maintenance.
Important facts for investors to verify
- Normalize comparisons for the 12-month FY2014 versus 11-month FY2013 periods, and distinguish reported recovery from the effects of impairments, restructuring, settlements and discontinued operations.
- Track comparable sales and gross margin, particularly whether Domestic price investments and International promotional pressure ease without undermining sales.
- Assess whether management achieves the revised $1 billion cost-reduction target and whether savings translate into improved adjusted operating income.
- Monitor actual Citibank credit-card economics, including the forecast revenue decline, and the extent and timing of the anticipated tax benefit.
- Review cash conversion, working-capital movements, lease obligations, debt maturities, credit ratings and access to revolving facilities.
- Follow the resolution and financial exposure of the appealed trade-secrets judgment, remaining LCD settlement collections and other disclosed contingencies.