Business context and reporting period
Best Buy Co., Inc. filed this unaudited Form 10-Q for the quarter ended August 28, 2010, the second quarter of fiscal 2011. The company operates Domestic and International consumer-electronics retail businesses. Results are seasonal, with the largest revenue and earnings historically in the fiscal fourth quarter. International results are consolidated on a two-month lag.
Financial performance and liquidity
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Three months ended Aug. 28, 2010 | Prior-year quarter | Six months ended Aug. 28, 2010 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $11,339 | $11,022 | $22,126 | $21,117 |
| Comparable-store sales | (0.1)% | (3.9)% | 1.3% | (5.0)% |
| Gross profit / rate | $2,918 / 25.7% | $2,684 / 24.4% | $5,711 / 25.8% | $5,241 / 24.8% |
| Operating income / rate | $411 / 3.6% | $280 / 2.5% | $724 / 3.3% | $576 / 2.7% |
| Net earnings attributable to Best Buy | $254 | $158 | $409 | $311 |
| Diluted EPS | $0.60 | $0.37 | $0.96 | $0.74 |
- For the quarter, revenue increased 2.9%, while operating income rose 46.8%. For the six months, revenue increased 4.8% and operating income rose 25.7%. Higher gross-profit rates drove operating-margin improvement; higher SG&A rates partly offset it.
- Six-month operating cash flow was $84, down from $238 a year earlier, primarily reflecting higher cash outflows for income taxes and other liabilities. Investing activities used $160, including $342 of capital expenditures. Financing activities used $905, including $667 for share repurchases and $118 of dividends. Cash declined $983 from fiscal year-end to $843.
- At quarter-end, total debt was $1,503, including $383 short-term debt, $32 current long-term debt and $1,088 long-term debt. Cash and short-term investments totaled $845. Current assets were $9,959 versus current liabilities of $8,471; the reported current ratio was 1.2. The $2.3 billion unsecured revolving facility had no borrowings outstanding at quarter-end; $160 was outstanding on October 4, 2010. International facilities had $383 outstanding and $811 available at quarter-end.
- Adjusted debt/EBITDAR was 2.4, compared with 2.5 at fiscal year-end and 2.8 a year earlier; debt/net earnings was 1.0, versus 1.3 and 2.3, respectively. Adjusted debt/EBITDAR is a company-defined non-GAAP measure.
Material changes and operating drivers
- Domestic quarterly revenue grew 1.9%, but comparable sales fell 1.4%; operating income increased to $407 from $315. Mobile and home-office gains were offset mainly by television and entertainment-software weakness. Online revenue rose 15%.
- International quarterly revenue rose 5.7%, with comparable sales up 4.3%; operating income improved to $4 from a $35 loss. Europe and China contributed to comparable-sales gains, while Canada was weaker. China benefited from consumer stimulus programs.
- The prior-year six-month period included $52 of restructuring charges; none were recorded in the current six-month period. The sale of Speakeasy generated a $7 pretax gain in the quarter. The company also repurchased 19.8 million shares for $705 during the six months; $1,795 remained authorized for future repurchases.
- Short-term debt fell to $383 from $1,091 a year earlier. The company reported that its adjusted debt/EBITDAR and debt/net earnings ratios improved, supported by lower borrowings and higher earnings.
Outlook, risks and contingencies
- Management said liquidity should be sufficient to sustain operations and fund anticipated expansion and strategic initiatives for the remainder of fiscal 2011. It moderated capital spending amid economic uncertainty. No specific earnings or revenue guidance was provided in the filing.
- Management described consumer spending as cautious and difficult to predict, citing economic conditions, consumer confidence, unemployment, credit availability and housing-market conditions. It identified new product introductions, promotions, inventory management and expense control as important business factors.
- At August 28, the company held auction-rate securities with $144 par value and $134 fair value, including a $10 pretax temporary unrealized loss. Failed auctions restrict access to principal; management intended to hold the securities until it could recover principal and stated it had other liquidity sources. Further valuation declines or impairment charges were possible.
- A purported class action alleges gender and minority discrimination in employment practices. The company disputes the allegations and intends to defend the case. Other ordinary-course legal proceedings were not expected to materially affect results or financial condition.
- Other disclosed risks include foreign-exchange and interest-rate exposure, consumer-electronics competition, product availability, pricing and promotions, and execution/integration risks. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether gross-margin gains can persist as comparable sales remain weak in key Domestic categories, particularly televisions and entertainment software.
- Whether operating cash flow improves after the unusually significant tax and liability-related outflows, and how planned capital spending and repurchases affect liquidity.
- The valuation, liquidity and potential impairment exposure of the remaining auction-rate securities.
- International profitability’s dependence on Europe and China, including stimulus-supported demand, and the cost of new-store expansion.
- Developments in the employment class-action litigation, credit-facility availability and compliance with debt covenants.