Business context and reporting period
Best Buy Co., Inc. is a multinational retailer of consumer electronics and technology services, operating Domestic and International segments. This Form 10-Q covers the quarter ended November 3, 2012, and the nine months then ended. The company changed its fiscal year-end, making fiscal 2013 an 11-month transition year; the nine-month comparison is 40 weeks in 2012 versus 39 weeks in the recast prior-year period. The business is seasonal, with a large share of revenue and earnings typically generated in the holiday-season fourth quarter.
Financial performance and position
| Metric | Three months ended Nov. 3, 2012 | Prior comparable period | Nine months ended Nov. 3, 2012 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $10.753 billion | $11.145 billion | $32.910 billion | $33.370 billion |
| Gross profit / margin | $2.586 billion / 24.0% | $2.853 billion / 25.6% | $8.057 billion / 24.5% | $8.536 billion / 25.6% |
| Operating income / margin | $12 million / 0.1% | $381 million / 3.4% | $307 million / 0.9% | $1.101 billion / 3.3% |
| Net income attributable to Best Buy | $(10) million | $156 million | $160 million | $496 million |
| Diluted EPS | $(0.03) | $0.42 | $0.47 | $1.30 |
| Operating cash flow | Not separately reported | Not separately reported | $(121) million | $1.900 billion |
Quarterly continuing-operations diluted EPS was $(0.04), compared with $0.47. Excluding restructuring charges, management reported adjusted operating income of $48 million for the quarter and $561 million for the nine months, and adjusted diluted EPS of $0.03 and $0.95, respectively; these are non-GAAP measures.
At November 3, cash and cash equivalents were $309 million; current assets were $11.846 billion and current liabilities $11.148 billion (current ratio 1.1). Total debt, including short-term debt and current maturities, was approximately $2.013 billion. Long-term debt excluding current maturities was $1.158 billion. Restricted cash was $375 million and is not included in cash and cash equivalents. Nine-month investing cash outflow was $412 million and financing cash outflow was $607 million. Cash fell by $890 million after the fiscal-calendar adjustment.
Material changes versus prior period
- Quarterly revenue declined 3.5% and comparable sales fell 4.3%; the nine-month revenue decline was 1.4%, partly offset by the extra week in the current-year period.
- Operating income fell 96.9% in the quarter. Lower sales, weaker gross margin, higher restructuring charges, and increased SG&A as a percentage of sales drove the deterioration.
- Domestic quarterly revenue fell 4.7% and operating income was $16 million, versus $249 million. International operating results moved to a $4 million loss from $132 million income; nine-month International results were a loss of $87 million versus income of $247 million.
- Nine-month operating cash flow turned negative, mainly reflecting a $1.330 billion inventory cash outflow, lower operating income, restructuring payments, and timing of tax and receivable settlements.
- Cash was materially lower than a year earlier, primarily following the $1.3 billion Best Buy Mobile buy-out, capital expenditures, share repurchases, convertible-debt retirement, and dividends.
Outlook, management commentary, risks and unusual items
Management provided no specific consolidated revenue or earnings guidance in the supplied filing. It said liquidity sources were expected to be sufficient for operations, anticipated capital investment, and strategic initiatives, while cautioning that cash generation or borrowing access could weaken. Capital allocation priorities include investing in Best Buy Mobile and online channels, controlling expenses, and improving return on invested capital.
The company initiated a U.S. restructuring that includes closing approximately 50 large-format stores and changing store and corporate operating models. It recorded $258 million of U.S. restructuring charges in the first nine months and did not expect further material charges, apart from continuing lease payments for vacated stores. A Europe restructuring began in the third quarter, with estimated pre-tax charges of $40 million to $60 million, expected to be substantially completed in fiscal 2014; $2 million had been incurred by quarter-end.
Management cited uncertain consumer confidence, discretionary spending, product cycles, intense price competition, and changing product demand as risks. Weak categories included gaming, notebooks, and televisions; mobile phones and Domestic appliances were stronger. International results were pressured by lower sales in Canada and China and lower European margins, including growth in lower-margin wholesale sales.
Credit risk increased: Standard & Poor’s lowered Best Buy’s rating to BB with a Negative outlook and Fitch lowered its rating to BB- with a Negative outlook in November 2012; Moody’s maintained Baa2 with a Developing outlook. The $500 million 2013 Notes mature in July 2013. The filing states that their interest rate rose following downgrades, to 7.25% after November 21, 2012. Best Buy reported compliance with credit-facility covenants at November 3.
The remaining auction-rate securities had a $23 million par value and $21 million fair value; auctions remained failed, limiting access to principal. A trade-secrets jury award of $22 million was followed by a $5 million exemplary-damages award in December 2012, after quarter-end; possible attorney fees and costs remained pending. Best Buy intended to appeal and stated it did not expect a material effect. Securities litigation remained unresolved, and possible losses could not be estimated.
Important facts for investors to verify
- Whether sales trends and gross-margin pressure persist through the holiday quarter, especially in televisions, notebooks, and gaming.
- Whether U.S. store closures and the Europe restructuring deliver expected operating improvements, and their total cash and lease costs.
- Cash generation, inventory levels, available liquidity, covenant compliance, and refinancing or repayment plans for the July 2013 Notes.
- How credit-rating actions affect borrowing costs, vendor terms, and access to financing.
- The final outcome and total cost of the Techforward litigation, including any attorney-fee award, and developments in securities actions.
- Comparability of reported trends given the fiscal-year change, extra reporting week, and discontinued-operations presentation.