Best Buy Co., Inc. — Fiscal 2010 Form 10-K
Reporting period: Fiscal year ended February 27, 2010 (52 weeks). The filing is an annual report, not a standalone fourth-quarter filing; it also reports unaudited fourth-quarter results.
Business context and performance
Best Buy is a multinational retailer of consumer electronics, computers, appliances, entertainment products and related services. Its reportable segments are Domestic and International. The International segment includes Europe, Canada, China, Mexico and Turkey; Europe, China, Mexico and Turkey results are consolidated on a two-month lag.
Management highlighted customer service, connected-device offerings, market-share gains, international expansion and cost control as strategic priorities. Best Buy estimated its Domestic market share increased 2.6 percentage points during the year, even as the consumer electronics industry declined.
Key financial metrics
| Metric | FY2010 | FY2009 |
|---|---|---|
| Revenue | $49.694 billion | $45.015 billion |
| Comparable-store sales | +0.6% | -1.3% |
| Gross profit / rate | $12.160 billion / 24.5% | $10.998 billion / 24.4% |
| SG&A / rate | $9.873 billion / 19.9% | $8.984 billion / 20.0% |
| Operating income / rate | $2.235 billion / 4.5% | $1.870 billion / 4.2% |
| Net earnings attributable to Best Buy | $1.317 billion | $1.003 billion |
| Diluted EPS | $3.10 | $2.39 |
| Operating cash flow | $2.206 billion | $1.877 billion |
| Capital expenditures | $615 million | $1.303 billion |
Revenue grew 10.4%, but the increase was substantially acquisition- and expansion-driven: Best Buy Europe contributed 5.8 percentage points, net new stores 4.3 points, comparable sales 0.6 points and foreign exchange 0.1 point; non-comparable channels reduced growth by 0.4 point. Net earnings rose 31.3%, reflecting higher segment operating income, lower restructuring costs and no repeat of prior-year impairments.
Domestic revenue was $37.314 billion (+6.4%), operating income $2.071 billion and operating margin 5.6%. Domestic comparable sales improved to +1.7%, led by home office (+12.8%); entertainment software declined 13.2%. International revenue was $12.380 billion (+24.5%), operating income $164 million and operating margin 1.3%. International comparable sales declined 3.7%. Europe’s acquisition materially lifted reported revenue and gross margin, while start-up costs and higher SG&A limited profitability.
Fourth-quarter FY2010 revenue was $16.553 billion, comparable sales increased 7.0%, operating income was $1.283 billion, net earnings attributable to Best Buy were $779 million, and diluted EPS was $1.82. Fourth-quarter FY2009 figures were revenue of $14.724 billion, comparable sales down 4.9%, operating income of $980 million, net earnings of $570 million and diluted EPS of $1.35.
Liquidity, debt and capital allocation
Cash and cash equivalents were $1.826 billion at year-end, with $90 million of short-term investments; together these totaled about $1.9 billion. Working capital was $1.6 billion, compared with a $243 million deficit a year earlier. Current ratio improved to 1.2 from 1.0. Total debt, including current maturities, was $1.802 billion, down from $1.963 billion; debt-to-capitalization was 22%, versus 30%. Including capitalized operating leases, management’s non-GAAP adjusted debt-to-capitalization ratio was 63%, down from 68%.
The company reported $663 million of short-term debt, primarily in International operations, and $1.139 billion of long-term debt including leases. Its $2.3 billion unsecured revolving facility had no borrowings outstanding at year-end, and the company was in compliance with covenants. Fitch rated the debt BBB+ with a negative outlook; Moody’s rated it Baa2 stable and S&P BBB- stable. Operating lease obligations totaled $8.480 billion, excluding approximately $2.2 billion of landlord tax and common-area charges. The company paid $234 million in dividends and made no share repurchases in FY2010.
Material changes, outlook and risks
- Best Buy Europe, acquired in FY2009 through a 50% interest, contributed a full year of revenue in FY2010. The company also acquired the remaining 25% of Five Star in China and acquired Napster in FY2009.
- Operating cash flow increased 17.5%, while capital spending fell 52.8%. Management said liquidity should be sufficient for FY2011 operations, expansion and strategic initiatives, subject to cash generation and continued access to credit.
- For FY2011, the company planned 50–55 net new large-format Best Buy stores, mostly Domestic; 75–100 small-format stores, primarily U.S. Best Buy Mobile; and 10–15 Five Star stores in China. It also planned to begin opening large-format Best Buy stores in the U.K. The filing provides no clear earnings or revenue guidance.
- Fiscal 2010 included $52 million of restructuring charges, versus $78 million in FY2009. FY2009 also included $66 million of Speakeasy goodwill and tradename impairment and a $111 million impairment of the CPW stock investment. No goodwill, tradename or investment impairment charges were recorded in FY2010.
- Consumer electronics demand, discretionary spending, competition and pricing pressure remain key risks. Management also cited changing product preferences, execution of international growth and acquisitions, foreign exchange, employee retention, information-system and Accenture dependence, and exposure to vendor supply disruptions. Five suppliers represented 35% of merchandise purchases; the top 20 represented just under 60%.
- Promotional financing card sales represented 17% of Domestic revenue. Changes in bank terms or credit-related regulation could affect sales. Auction-rate securities worth $280 million were difficult to liquidate due to failed auctions; $88 million was subject to UBS rights expected to be exercised in FY2011.
- A pending employment-discrimination class action had no recorded accrual because the potential loss could not be estimated; class certification was awaiting a court decision. Other routine legal proceedings were not expected to have a material effect.
Most important facts for investors to verify
- How much of revenue and earnings growth came from underlying comparable sales versus acquisitions, new stores and foreign exchange.
- Whether International operations can improve profitability as Europe’s contribution grows and new markets develop.
- Whether Domestic margin gains and cost controls can offset product-mix shifts, price deflation and competitive pressure.
- Liquidity and cash-flow quality, including inventory growth, restricted cash, the recoverability and timing of ARS proceeds, and substantial lease commitments.
- Progress and returns from the FY2011 store-opening plans, U.K. large-format launch and other international initiatives.
- Updates on the employment class action, tax contingencies, credit ratings and financing arrangements.