BEST BUY CO., INC. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the 13 weeks ended May 2, 2015. Comparisons are with the 13 weeks ended May 3, 2014. Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $8,558 | $8,639 |
| Gross profit / gross margin | $2,030 / 23.7% | $1,967 / 22.8% |
| Operating income / operating margin | $86 / 1.0% | $210 / 2.4% |
| Continuing-operations net earnings | $37 | $469 |
| Net earnings attributable to Best Buy shareholders | $129 | $461 |
| Diluted EPS, continuing operations | $0.10 | $1.33 |
| Diluted EPS, total | $0.36 | $1.31 |
| Cash from operating activities | $(10) | $308 |
- Revenue decreased 0.9%; comparable sales increased 0.6%, but declined 0.7% excluding the estimated 1.3% revenue benefit from mobile installment-billing accounting.
- Non-GAAP operating income was $219 million versus $221 million; non-GAAP diluted EPS from continuing operations was $0.37 versus $0.35. These measures exclude specified items and are not GAAP measures.
- Results include $67 million of net CRT litigation settlement proceeds in operating income. Reported continuing-operations earnings also reflect $186 million of restructuring charges and $11 million of non-restructuring asset impairments.
- Prior-year GAAP results benefited from a $353 million discrete tax benefit tied to a U.K. subsidiary election. Excluding that item, the prior-year effective tax rate was 39.0%; current-quarter effective tax rate was 50.3%.
Liquidity, debt and capital
- At May 2, 2015, cash and cash equivalents were $2.173 billion and short-term investments were $1.566 billion, totaling $3.739 billion. The current ratio was 1.5.
- Total debt was $1.607 billion, including $383 million classified as current, principally because the $350 million 2016 Notes mature in March 2016. Long-term debt, less current portion, was $1.224 billion.
- Cash decreased $453 million during the quarter. Investing activities used $214 million and financing activities used $238 million; the latter included a $180 million special dividend. Management attributed lower operating cash flow primarily to timing of vendor and tax payments.
- No borrowings were outstanding on the $1.25 billion revolving credit facility; the company reported compliance with its financial covenants. Management said available liquidity was expected to be sufficient for operations and planned investment, while noting that future cash generation and borrowing access are not assured.
- The company declared dividends of $0.74 per share for the quarter, including the $0.51 special dividend. It announced plans to repurchase $1.0 billion of shares over three years; $69 million had been repurchased after quarter-end through June 5, 2015.
Material changes and business developments
- Domestic revenue rose 1.4% to $7.890 billion and operating income increased to $304 million from $226 million. Domestic comparable sales were down 0.7% excluding installment-billing effects; online comparable sales grew 5.3%, slower than the prior-year 29.2% growth.
- International revenue fell 22.1% to $668 million, reflecting a 10.1% foreign-exchange headwind, Canadian store consolidation and continued Canadian market softness. International operating loss widened to $218 million from $16 million.
- Best Buy consolidated the Future Shop and Best Buy brands in Canada: 66 Future Shop stores closed and 65 converted to Best Buy. The company recorded $188 million of restructuring charges and $3 million of other consolidation costs in the quarter; it expects total pre-tax charges of $200 million to $280 million, including $140 million to $180 million in cash charges.
- On February 13, 2015, Best Buy completed the sale of Five Star in China and recorded a $99 million gain. Discontinued operations contributed $92 million of net earnings for the quarter, largely from that gain; Five Star had generated a $8 million loss in the prior-year quarter. One Shanghai property remained held for sale.
- Gross margin improvement reflected Domestic mix and credit-card portfolio performance, along with CRT settlements. The filing also cites lower-margin product mix and promotional pressure in Canada, and continuing softness in tablets, computing, entertainment and services.
Outlook, management commentary and risks
- For Q2 FY2016, management expected Domestic revenue growth of flat to low-single digits and Enterprise revenue growth of flat to negative low-single digits. It projected an Enterprise non-GAAP operating-margin decline of 0.3 to 0.5 percentage points year over year and a continuing-operations tax rate of 38% to 40%.
- For Q2, International revenue was expected to decline 30% to 35%; the International non-GAAP operating margin was projected at negative 3.5% to negative 5.0%, reflecting Canadian consolidation effects.
- For the balance of FY2016, management projected a negative $0.10 to $0.20 diluted EPS impact from the Canadian consolidation. It also planned up to $160 million of Canadian capital investment over two years.
- Fiscal 2016 growth initiatives were expected to cost $100 million to $120 million, or $0.17 to $0.21 per diluted share; approximately $30 million, or $0.05 per share, was invested in Q1. Renew Blue phase two targets approximately $400 million of annualized savings over three years, including about $250 million from returns, replacements and damages; savings were not expected to begin until the second half of FY2016.
- Management described improving customer experience and investment in services, appliances, mobile, online and in-home capabilities as strategic priorities. It cautioned that retailer performance is exposed to consumer spending and confidence, competitive pricing, product cycles, foreign exchange, execution of restructuring and growth plans, supply chain issues, and other risks.
- Best Buy is defending securities litigation concerning historical earnings guidance; the potential loss range, if any, could not be estimated. The company received $67 million net proceeds from CRT antitrust settlements and said further recoveries were uncertain. Other ordinary-course legal matters were not expected to have a material effect, based on management’s assessment.
Important facts for investors to verify
- Whether underlying domestic demand and margins improve after separating installment-billing effects and CRT settlement proceeds from reported results.
- Actual costs, cash outlays, customer retention and operating performance following the Canadian brand consolidation, including the remaining expected charges and planned capital investment.
- Delivery and timing of Renew Blue savings versus growth-investment costs, and whether online, services and appliance initiatives translate into profitable growth.
- Liquidity and refinancing plans for the $350 million 2016 Notes, alongside dividends and announced share repurchases.
- Progress and potential exposure in the securities litigation, and any additional CRT settlement recoveries.